Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Microsoft Corporation (NASDAQ:MSFT)

Financial Analyst Meeting Call

September 19, 2013 16:00 ET

Executives

Chris Suh - General Manager, Investor Relations

Steve Ballmer - Chief Executive Officer

Amy Hood - Chief Financial Officer

Kevin Turner - Chief Operating Officer

Tami Reller - Executive Vice President, Marketing

Julie Larson-Green - Executive Vice President, Devices and Studios Group

Satya Nadella - Executive Vice President, Cloud and Enterprise Group

Terry Myerson - Executive Vice President, Operating Systems Group

Kirill Tatarinov - Corporate Vice President and Head of Business Solutions Group

Qi Lu - Head, Applications and Services Group

Analysts

John DiFucci - JPMorgan

Walter Pritchard - Citi

Kash Rangan - Merrill Lynch

Phil Winslow - Credit Suisse

Ed Maguire - CLSA

Keith Weiss - Morgan Stanley

Kirk Materne - Evercore

Brent Thill - UBS

Emily Chan - Sanford Bernstein

Jason Maynard - Wells Fargo

Ken Copley - Capital Executive

Ross Macmillan - Jefferies

Rick Sherlund - Nomura

Unidentified Company Representative

Ladies and gentlemen, please welcome General Manager, Microsoft Investor Relations Chris Suh.

Chris Suh - General Manager, Investor Relations

Welcome to the FY ‘14 Microsoft Financial Analyst Meeting. It’s great to see all of you here and also welcome to those joining us on the webcast today. So this is the first analyst meeting we have had in a couple of years. We made a decision at that time to talk more frequently to you at events like launch events, which we have done, and more recently at Build and at E3. But with everything going on in the company, we thought a focused event, focused and dedicated to the investment community was the right thing to do. And so I welcome you here. I also want to acknowledge that for many of you, especially coming from the East Coast, this is one of several consecutive weeks who are travelling out west and we do appreciate all the time that you are spending with us.

So before we get started, I do want to cover the forward-looking statement. So the presentations today contain forward-looking statements, which are any predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors in this presentation and in the Risk Factor sections of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.

So with that before we dive into the agenda for the day, and we have a really great one, I do want to cover a couple housekeeping items. First, we are streaming today’s event live on the Microsoft Investor Relations website at www.microsoft.com/investor. The PowerPoint slides and transcripts from today’s event will also be available on our website following each presentation. And secondly, most of you have already probably received an e-mail containing a link to a survey. The feedback we get from you about the event is really important. We would very much like to get your feedback. We also have a drawing. For those who complete and submit a survey we will have a drawing for actually one of our new Xbox One consoles at launch. And I know there is a bunch of gamers out here who are eager to get your hands on one. So please do submit the survey.

So with that, this is normally the time where I would cover the agenda, but as Amy and I were planning for the day, she really also wanted to come out and welcome you and share her thoughts for the day and set the context as we start the day. So with that, I want to introduce Amy Hood, our Chief Financial Officer. Great, thanks Amy.

Amy Hood - Chief Financial Officer

Thank you. Welcome. I can honestly say it’s a real pleasure to have you all come out, be able to meet and shake hopefully a lot of hands after. I got to say hello to a few of you before. It means a lot that you will come out and spend some time with us, and we look forward to being able to share with you the journey we are on as we transition this company. You will hear a lot about that today.

Before I do that, I want to welcome John Thompson, who is our lead Independent Director at the Microsoft board. John is the Head of the Special Committee that’s directing the CEO succession and search plan. While I know you have lots of questions on that, I wanted to go ahead and let you know there will be no further update on that today. The board continues on the process that we laid out in late August. So while I appreciate the questions we are working the process that we laid out and we will update you when appropriate.

With that, I want to talk a little bit about what the agenda today was meant to do and want to do it in the context of the strategy that we laid out and Steve laid out in July. Our goal is to have Kevin start the day. Kevin is going to cover really how we are already executing today in the field on this transition, how we are already building momentum and we are already taking share with this plan. It’s really a plan we have been executing in many ways for years and laid out in the first way when we put the word devices and services in our 10-K a year ago. And so I look forward to you guys hearing from the person closest to the action about what we are really seeing in the market today and where we are taking share.

After that, we are going to have an engineering panel, which has our key engineering product leaders that will be hosted by Tami Reller. I appreciate that many of you submitted questions. I appreciate that you put forward the hard ones. And I look forward to having Tami ask our engineering leaders those questions on your behalf today. Then we will open it up if there is further questions you can just ask directly. I think that will give you each an opportunity to get a sense of how the devices and services and high-value scenarios are really how they are working everyday to build that vision for the future. And that’s what I hope you will hear specifically in the engineering panel. I also think it’s a good opportunity for you to see the new leaders in their new seats. Many of you have not had that opportunity. I can tell you I take great energy from working with them everyday, and I hope you will feel that same positive energy from them on the stage. We will take a quick break and hopefully we will be on time. That would be a feat but I am committed.

Then me, Amy Hood, the Chief Financial Officer, I am very proud actually to be able to say that. And I will talk a bit about the business model transformation and the changes in our business model that devices and services with high-value activities means. We have already made big transitions, but I think we can do a far better job of explaining to you all what that looks like. And I heard that feedback in my past five months on the job and I look forward to giving the first steps in explaining that today. We will also talk about the impact that’s going to have on our reporting statements as I talked about at the end of Q4. Then I will turn it over to Steve to talk really about how we are setting this company up to capture all the opportunity that we see. After that hopefully we will have a chance to talk one-on-one at the reception and look forward to many more conversations with all of you in the future and looking forward to showing you the progress and the acceleration that I think you will see from us.

So with that, let me introduce Kevin Turner, our Chief Operating Officer who I think is the best man for the job in terms of explaining what we are seeing and all the progress and success that we are having in the market. With that, let me turn it over to Kevin. Thanks Kevin. Good to see you.

Kevin Turner - Chief Operating Officer

Well, good afternoon. It’s great to be here and it’s great to be able to share what we are doing in the company and the things that we have going on. We have a lot of change. Certainly, we are embracing, but I am really, really proud that you came out and that we get to spend this time together. So I look forward to the day and the discussion.

You know, my mission and purpose today is to really lay out for you where we have strength, where we have momentum, where we see growth opportunities and absolutely show you while this business faces some headwinds in our PC market, with the PC market growth and with the acceptance of Windows 8 in the marketplace, we have a full transition that’s underway. In fact, we have an incredible transition that’s underway. And we have got some incredible momentum and some incredible growth and we see some incredible opportunities that I will touch on today. So that’s my purpose and mission for you today.

Now, as we get into it, in an FY ‘13 sense, I thought I would also give you some more context around that momentum. There is a couple of things that you may or may not have pulled out or delineated in our numbers that I will share. In the enterprise side for last year, our enterprise agreement billings were up 13%. Our unearned revenue, in other words, the deals that we have signed, but we have not booked, are up 12%. That if you compare that to any significant technology company that has any profitability that was best of the best across the enterprise last year. Big time, big time growth, big time opportunity and I think we are just getting started.

Office 365 became the fastest growing product in the history of Microsoft last year, fastest to $1 billion. We did over $1.5 billion last year, and it continues to accelerate and grow. Bing advertising grew 32%. Qi Lu and his team did a fabulous job increasing our revenue per search. And we see great momentum there. Double-digit revenue growth across SQL Server, System Center, Exchange, CRM, Lync and SharePoint big drivers of the revenue growth and where we saw a lot of volume.

Strong market share gains, ladies and gentlemen, across our enterprise cloud and I will share a little bit more context on that with you in a moment, SQL, Hyper-V, our virtualization product, Lync, and Xbox. Xbox became the worldwide console share leader last year and we are very proud of that performance as well. Additionally, we have a giant XP install base. But guess what? We have made so much progress on that XP install base. It’s down to 21% worldwide. And we have plans to get that number to 13% by April when the end-of-life of XP happens. This has been a major and multiyear initiative for us and one that we have worked very hard on to make sure we can execute towards.

Microsoft China, Brazil and Russia all exceeded $1 billion in revenue for the very first time in the history of the company. And there is a lot of significance around that in the BRIC markets and we like the momentum and where we are going. China incidentally is the fastest growing market in the company today. And it’s been a long, long time since that’s been the case at Microsoft and that is the case today.

Customer satisfaction, ladies and gentlemen, in our enterprise accounts is at an all-time high. And I am very, very proud of that. Our folks in the field in the frontlines have really done a spectacular job working with our customers, building their trust, developing and implementing the solutions at a faster rate than ever, and it’s showing up in all of the surveys, both internally and externally. And one of the things that you may or may not know about our business and this transition that we are in is we have made a very graceful transition from our traditional enterprise agreements and the licensing agreements that made Microsoft so profitable for so long as we transition those agreements and those customers into the cloud. We have done a phenomenal job landing them gracefully from a transition perspective and I feel very good about that. So those are some under-the-cover highlights that I wanted to share with you about our business.

Now, I also have a chart here that we don’t show much externally. So today, it’s been updated for you to be able to see and get the flavor. We don’t break our business down too often for you by customer segment. But if you look at our business and the makeup of the company today, well over 55% of the business is enterprise and additionally, there is some OEM business there that belongs in enterprise, but that’s how we count it and market. 19% is OEM, 20% is consumer and online and a fair piece of the OEM is also consumer and online. And 6% is our small and midsize business. And then when you look at that full picture as a segment, it’s really telling of where we got a lot of strength and it’s complemented with our consumer presence. And I will talk more about that in a moment.

On the product side again, the Office Division is the biggest division in the company at 35% of our overall total; Server and Tools is second at 26%; Windows is third now at 25%; Entertainment and Devices at 13%; Bing and Online at 4%. So you can see the shape and transition of our business on this particular chart that Windows is now the third largest business in the company.

When you also look geographically, 44% of our revenue, ladies and gentlemen, comes from the U.S. and Canada and 56% comes from the rest of the world. I show you and illustrate these pie charts so that you can see we have a very balanced and diverse business, not only from a customer segment standpoint, but from a geographic and the theaters of operations where we operate and also our products and services.

Now, another chart that we don’t show that often is the productivity and efficiency. In the field, in our field sales and marketing group, we have around close to half the company sits in this particular organization that I get the chance to work with. And over the last several years, we have done some incredible things from an efficiency and effectiveness standpoint to continue to drive the productivity up in the field in a big way. And when you look at it, you think about that efficiency and effectiveness. That includes the headwinds that we have got with our OEM partners with the PC market. We are still driving productivity increases in the field. And a big, big credit goes to the productivity as well as the solutions that our engineering groups are bringing to the marketplace. So efficiency and effectiveness has been alive and well here at Microsoft and continues to be something that we are going to continue to drive going forward.

Now, let me touch on devices and services. You are going to hear a lot about that throughout the day. And let me tell you from my vantage point, a few things about it. Devices and services, to me it doesn’t mean that we are going to make all the devices. We want a healthy ecosystem. We absolutely love partners and we want that open ecosystem, but it does mean we are going to make some of the devices and some of the hardware. And so you are seeing us get into some of that first-party hardware. And it also means that on the services side, that really the scale services that we have in the company are really in the consumer space. And as a result of having those consumer services, we are able to deliver world-class business services at scale, which we couldn’t do otherwise, which makes us a very, very fundamental competitor.

And so when you think about the opportunity of these two worlds, I want you to understand that we see and know about the seams between hardware and software integration. We know that. That’s been exploited against us in the past. But going forward, we have got a much different lens to be able to engage more deeply with our partners by having first-party products. And it is when we announced Surface a little more than a year ago, there was a lot of consternation, let’s say, in the OEM channel. As a result of that consternation, today when you talk to the OEM channel in most instances, they would tell you that the progress we made in 8.1, because we have a first-party product at Microsoft, is far superior to anything we have ever delivered from hardware-software integration to our OEM partners going forward. And again, you are going to see that more and more of the seams within the technology and the hardware and the software are going to go away and dissipate as we get better and better and certainly continue to build our capability in this area.

Now, there are four giant mega trends we see in the marketplace, where customers are spending money. They are cloud, social, mobility, and big data. We see these mega trends as excellent opportunities for us to be able to drive growth. But let me start with the cloud. Gartner says that the public cloud market by 2015 is a $180 billion opportunity. We agree with that. In fact, we may even say it’s going to be bigger than that by 2015. If anything, we are bullish on how fast customers are moving to the cloud.

One of the areas that we made a lot of traction on this past year was the progress we made in our consumer cloud services. In the consumer cloud service space, we have a 13% growth in users year-on-year. We are averaging now 5.6 billion queries per month on our Bing product. Almost 27 points of the market share in the U.S. on this particular product. And we have an application out there called BingItOn.com. And for everybody that goes to that site that does side-by-side searches with the next-biggest competitor, we win two out of three times. And so we have got a lot of traction in this particular area and a lot of momentum that we are driving. Thanks to the hard work of the engineering group, 460 million users on MSN. Xbox LIVE is now one of the largest paid services in the world at 48 million Xbox LIVE members in 41 countries, and that business continues to explode. Skype now drives a third of all international phone traffic, and people spend over 2 billion minutes, ladies and gentlemen, 2 billion minutes per day on Skype.

Outlook.com, 400 million people use Outlook.com. This product is growing again; it’s vibrant; we have re-launched it; we took Hotmail, made it contemporary and modern; and we are seeing a lot of traction and pickup on Outlook.com. And SkyDrive, one of the fastest adopted products in our history, now has 250 million people using SkyDrive, which is incredible. The thing I want people to understand about these consumer services is these are all multi-tenant, at-scale, gigantic services that allow us to do a very, very good job on the enterprise services. And we have learned a ton about how to do these services at scale, how to manage the bandwidth, how to make sure that we have the right cost-effective solution that we would have never been able to do had we only concentrated on enterprise services first. Now, the traction we’ve had on enterprise services is phenomenal. Office 365, which I talked about, 1.5 billion from a run rate perspective, we should blow that away this next year, ladies and gentlemen, that is the fastest-growing product we’ve ever had. And it continues to be very widely adopted, and I will talk more about that in a moment.

We’re now really getting into public sector and government. In fact, we have got a million government employees in the U.S. moving to Office 365. And more importantly, we have had some significant wins in Canada, India, Australia, the UK, France, and Germany on our cloud as well. So the momentum in the public sector space for public cloud is incredible.

Azure is growing at 200%. And more impressively, 50% of the Fortune 500 now use Azure. And so we have really come out of the gate. We came out of the gate with some advanced technology from our Server and Tools team as it relates to platform as a service. They have added the infrastructure as a service capability in the last year, and we really see the uptake happening in an accelerated way. And we have enterprise cloud services in China. And to the best of our knowledge, ladies and gentlemen, we are the only multi-national technology company in the world who offers public cloud services in China. And we have an incredible amount of pent-up demand. And that is a beautiful thing for Microsoft. Because as you know, we are IP-challenged in China, and now in the cloud services world, everybody that uses the service pays for the software and the service. And so that’s we see that as a significant strategic enabler for us to continue to make a lot of progress on.

Our CRM Online business is growing over 80%. And Kirill and the Dynamics team have done a phenomenal job on this particular product, and we are really seeing a lot of great uptick and traction. Now, I wanted to share with you some of the details. And I won’t clear all of this slide, but I wanted to give you the context of this particular slide. This is a slide we use with customers. This is a slide we use to really go in and show the breadth and depth of the Microsoft enterprise cloud services that we offer today.

Ladies and gentlemen, we offer three distinct types of cloud: private, hybrid, and public across three distinct types of workloads and applications. And if you take infrastructure and platform with Azure and SQL Azure and Windows Azure, we also provide a service there with Intune where we remotely manage desktops. We have an incredible offering in that space. Now, on the business solutions side, Dynamics CRM, Dynamics ERP, which Kirill and his team are cloud-enabling and working hard on that, as well as our partners, is also a very, very accelerated growth business for us.

And then the big space, which is productivity and collaboration, is something that, again, we are very, very strategically well-positioned. This is what we offer in market today. And if a customer has Active Directory and System Center completely deployed, we can take them to the cloud with ease. In that way, they have common identity, they can take advantage of the virtualization, common management, and the development environment is very unified so that the enterprise doesn’t have to care whether it’s on premises, hybrid, or in the public cloud. So we have got a leading and comprehensive enterprise cloud offering. And that’s backed up with the significant momentum that we have.

Now, let me give you a statistic. This past year, we grew Office 365, deployed seats, over 350%. 350% deployed users we added in FY ‘13 alone. And it’s still accelerating. We are only at the tip of the iceberg of this particular opportunity. And I already touched on 200% growth in Azure and 80% growth in Dynamics CRM, CRM Online. So when you think about Dynamics and CRM, you think about Azure and you think about Office 365, we have significant momentum.

Some of you ask from time to time, though, well what are you doing about Google in the enterprise? Well, right now, we are winning them back one account at a time, one hand-to-hand mission at a time. In fact, this past year, we had 440 customers won back in FY ’13 alone. And that’s an incredible compliment to the technology and all of the work that our Office 365 team did to enable that and it’s a compliment to our people who have earned the trust of customers. Because it turns out that security, privacy, data protection, enterprise-grade cloud are very, very important to enterprise customers. And we don’t think that’s going to change; we only see that accelerating. And it helps that we don’t read people’s e-mails and snoop their WiFi and those type of things, because it gives them comfort to be able to invest in our solution. But that’s something, again, from an enterprise perspective, is very, very important for us to continue to drive that.

Now, here is a slide we’ve never seen before because we get a lot of questions about this transition to the cloud, you know, really is it underway? Well, I took four actual accounts. You can see there a business technology consulting company, a car company, global electronics company, and an entertainment company. This was our Microsoft enterprise revenue before they went to our cloud. After our cloud deployment, this is our revenue opportunity. You see, Microsoft has never been considered a mission-critical IT provider, service provider in the enterprise. Today, we are. That’s the new Microsoft. The new Microsoft says we are getting a much richer and deeper share of wallet, ladies and gentlemen, from those customers who go to the cloud with us. And we see this over and over again. So we have a great opportunity to be able to leverage that and continue to leverage that. And you have got both Office 365 and Azure accounts so that you can see the full assortment of our offering in the marketplace. We think this is a tremendous opportunity for growth and upside.

I also get a lot of questions. Well, what are you doing about private cloud? How are you really competing against a really good competitor like VMware? Well, you know what, we started with zero share. I love this chart because in ‘08, we had nothing. We were absolutely at zero. If you look at what’s happened, really in the last 7, 8 quarters, it’s been an incredible shift of what’s happened. VMware peaked its share at 54%, and they are down to 52.4%. All we have done during that timeframe is go from 22 points to 30 plus points. And we are just driving and winning share according to IDC, every single quarter. And we are just going to keep doing that. I mean, we are growing at almost three times their rate today for two reasons, ladies and gentlemen, we have better technology. When Windows Server 2012 came along and the new release of Hyper-V the product group gave us a better technology platform to be able to go in and win this business. And as a result of that great technology, we also have a better value proposition. We are about a third the price. And so when you think about better technology and a better value proposition, it really is a powerful formula to continue to accelerate the growth. And we are going to continue to drive that.

Now, the second big mega trend I want to talk to you about is social. And specifically, I want to talk to you about enterprise social. If you take the market of just unified communications and you take CRM and put those two together, we see it as a $38 billion opportunity according to Gartner, and that’s a huge, huge potential for us because we have a lot of assets lined up in this space. When you look at what we have got to leverage and lean on in the enterprise social space, two out of three information workers worldwide use SharePoint today. 85% of the Fortune 500 use Yammer. And the Yammer-paid network is a wonderful company that we acquired a while back, the paid users on the Yammer network last year grew 200%. 90 out of the Fortune 100 are using Lync and Skype is still growing like crazy 300 plus million Skype users and now that we have integrated Lync and Skype, and I will touch on that in a moment. It’s an incredibly effective scenario that we have to be able to take the enterprise social to the next level.

One of our biggest assets certainly is Active Directory. And the ability to put Active Directory in the cloud gives us this incredible opportunity that we have on identity and management and single sign-on and all of the things for provisioning of the cloud and enabling of the social enterprise. Now, when you think about the unified communications space, what we are able to do with the Lync business and the Skype business, and Tony Bates formerly and his team have done an incredible job bringing these things together. Lync is a billion dollar product. Skype has 320 million users. And in addition to that, you might not know, Skype by itself grew connected users last year 30%. That’s an incredible number. And it’s only accelerated since they became a part of the Microsoft family.

And the ability to take Lync and Skype, now Microsoft is shipping more enterprise voice lines on unified communications than any other technology company in the world. And we are just going to continue to drive and leverage that opportunity, because SharePoint as a product, ladies and gentlemen, was extremely powerful behind the firewall. It was formerly the fastest growing product in the history of Microsoft until Office 365 came along. With the new release of SharePoint, we not only do a great job behind the firewall, we also built hooks in the product that allow external data feeds from LinkedIn, Twitter, you know pick your favorite social mechanism, you now have the ability to get internal and external data feeds to be able to exploit the capability. And when you put it together with CRM, Lync and Skype, Yammer and the integration of the Yammer into SharePoint and Office 365, we have got an incredibly compelling story as it relates to social and the enterprise.

And one piece of social that I had to touch on here because it’s so impressive is in the Xbox LIVE space, 48 million users as I said in 41 countries. Couple of stats you may not know, 42% of the Xbox LIVE subscribers in the U.S. now watch 30 hours of digitally distributed TV and movies every month. And also we are proud to be able to report now nearly 40% of the Xbox LIVE audience in the United States is female. That’s a giant change from when we launched our platform. And Xbox delivered over 18 billion hours of entertainment globally in 2012 alone.

And we are excited about the upcoming Xbox One launch. We believe we have got an incredible offering with Xbox One as it relates to multiplayer experiences and services. It’s going to give you, we have wrapped a lot of entertainment with the product as well and we believe we have got our strongest game line up, and the external pundits say it as well that we have ever had to be able to offer the company. So we are excited about the potential of what we can do with Xbox and Xbox LIVE from a social perspective.

Now everyone knows mobility is on fire. Mobility has changed how and where people work and communicate today. It’s a mobile applications and mobility-first market out there. It’s the driving force behind the Internet of Things. And according to Gartner, it’s $716 billion in devices that will be spent by 2017. The two key areas that we are going to focus on, on mobility first and foremost is around productivity. We are really driving for the best Office Mobile experience across all platforms. And we want to provide a great experience on both iOS and Android phones. And when you think about what we have done, we now have Office Mobile for iPhone in the Apple app store. It’s free for those Office 365 subscribers. And it’s available in 135 markets and 29 languages.

Office Mobile for the iPhone lets you view and edit across Word, PowerPoint, Excel and you get the similar experience to what you get on a Windows Phone. And we have Office Web Apps available for iOS, high-fidelity document viewing in Word, Excel, PowerPoint, and OneNote on the iPhone and we have some viewing and some editing available on the iPad. And so we are continuing to work through how to bring and be the strongest productivity player across all platforms, including iOS and Android in the marketplace.

The second big area that we are focused on in mobility is we want to be the leader in mobile device management. And with the new release of System Center, we not only manage Windows devices, we also manage iOS and Android devices really well. And we wrapped with Intune, we have an incredible story to be able to bring mobile device management to a whole new level across all devices. So in the bring your own device world, we have a great solution with System Center to be able to help enterprises and businesses really and deeply manage all devices.

You know we have a great release with Windows 8.1 coming out. And I wanted to touch on that for just a moment. In 8.1, we have got some incredible enterprise features. We have got tremendous IT controls built into 8.1. We have got the ability to do remote data business removal. We have got open mobile device management available, so you no longer have to have a server at your enterprise to be able to manage the mobile devices. We have got direct access, which require no separate VPN to be able to get into the network. We have got something called Workplace Join, which is very exciting. The ability for someone to show up at work with their own but personal device for them to be able to use Workplace Join, for the enterprise to be able to control the business data on that personal device, and in the event that employee leaves the company, loses the device, the corporation, the enterprise, has the ability to remotely wipe and clean the business data only on that device without touching, harming, or impacting the personal data. This is powerful.

In fact, we had 117 of our largest CIO customers here this week at our Global CIO event. This was one of the most talked about features we had at the event, the ability to really control bring your own device and really have the high-powered security, management encryption technologies that we have come to invest in over the last probably 13, 14 years in this particular area. So I am very excited about our device management strategy.

We have also made some impressive progress as it relates to Windows Phone. The one thing we know about Windows Phone is when people use it, they really, really like it. In fact, we won a lot of surveys this past year on the quality of the experience. And yes, we are proud of the fact that we have now scratched and made progress to be the third largest selling smartphone OS in the world. Now, we are a distant third. So we have got a lot of work to do there, but we are making progress and continuing to innovate in a giant way.

When you look at some of the progress we have made globally, Latin America up 900%, India 400%, China up 300%, Asia-Pacific up 300%, Middle East and Africa up 700%. Again, the momentum in the marketplace, particularly outside the U.S., is accelerating for us. And we are going to continue to double down and leverage that. And one of the things that we are very excited about is the capability that Nokia brings to the company. Not only do we have an impressive line-up of devices, the 1020 at the high end, which has a 41-megapixel camera. It’s the best smartphone camera in the world, all the way down to the Nokia Lumia 521, that is really selling well from an opening price point perspective in emerging markets. This past week, we launched the Nokia 925, where we got into metals – Nokia got into metals and its available here at AT&T. It’s our thinnest and lightest offering. It’s a very, very impressive phone.

And so the capabilities that Nokia brings with us on distribution, supply chain, the ability to continue to leverage the economies of scale that they bring, we are very excited pending regulatory approval of the potential and possibilities of this particular acquisition. But I also want to stress the fact that we remain very open with our phone system and we have phones available from HTC, Samsung, Huawei, TCL, Alcatel, we want to continue to have that opening existing. And we are going to continue to provide that because we believe that’s an important part of our offering going forward.

Now, for the holiday, a lot of questions have been raised around what about the tablets, what about the devices? This year we have got a very impressive holiday set of devices coming out from our OEMs. And I have got to tell you, I haven’t been as excited as I am in a very long time around Haswell and the potential for Haswell devices and BEETLE devices and what they can do in the marketplace. Haswell from Intel gives us the capability to have a fan-less device on an X86 platform, which means thinner, lighter, better battery life. And so that is going to open up a whole plethora of new devices, new styles, new form factors in the marketplace. And again, we are very excited from tablets to two-in-ones to affordable touch notebooks to ultrabooks all the way through the big all-in-ones out there that you see. So we are working hard with our OEM partners across the board to bring the very best devices we can to the marketplace. But to do that, we have got to improve the retail buying experience. It hasn’t been what any of us would have liked.

And we have got a couple of rollouts going on right now in Best Buy and Dixons that I will give you a little color on. In the Best Buy stores, we have done 200 stores so far. And we are absolutely seeing an increase in the Windows device category after we reset the store with the Windows Store. And all of the learnings that we have gotten from our physical stores, we have cranked into how to do this extremely well within the Best Buy store. And the ability to get that synergy and make the Windows PC buying experience, the Windows tablet buying experience, the Windows Phone buying experience get that to a whole new level is what we are allowed to do with this new format. And I encourage you if you are in town the Best Buy here in Bellevue is reset. It’s one of the 200. And you should check it out. We are also doing something very similar in Dixons and working our way through the key retailers around the world to really figure out how to improve this in-store experience and be able to become much richer and certainly much more impressive from a device buying experience standpoint.

The last mega trend I will touch on is Big Data. IDC claims this is a $24 billion opportunity by just 2015. We would agree with that. Our Big Data assets line up like this, SQL, certainly at the heart, double-digit (Technical Difficulty)…

Chris Suh - General Manager, Investor Relations

Thanks for your patience. We had a power outage in the building. We are doing it as quick as I can – as quick as we can back there the teams are running, but I just did want to give you an update. Thanks for your patience. We will get going very shortly. And as soon as we are up and running with the webcast as well, because this event is webcast. We will come back out we will start the panel, but hang tight and thanks very much.

When I talk to most of you, you tell me how interesting it is to cover Microsoft. I guess this just adds to the folklore. So we are back. We had a partial power outage. The teams have worked furiously and we are back online. So welcome back everyone. Welcome back to those on the web. We are going to go ahead and keep with the schedule. I do want to let you know also that Kevin’s full presentation will be posted shortly to the Microsoft Investor Relations as you can access the entire presentation in its entirety. We did just take the break and so we are going to go ahead and move straight into the panel. And with that, I want to introduce Tami Reller, Executive Vice President, Marketing.

Tami Reller - Executive Vice President, Marketing

Thanks Chris.

Chris Suh - General Manager, Investor Relations

Thanks Tami.

Tami Reller - Executive Vice President, Marketing

Great. So it’s a great pleasure to be here and we are back to business. I am very honored to be able to host this panel. I think this will be a very good way for you to get a chance to see our engineering leaders in action, hear from them, and get some perspectives on the opportunities ahead, the challenges ahead and some of the priorities that we have as a company. And so I’ll bring them out shortly.

I mean, on July 11, we announced a pretty significant reorganization to really drive the transformation of our company. And I can tell you that in the two months since that time, I certainly have seen the senior leadership team working more effectively together and that was the goal really to breakdown barriers and instead of working in any kid of silos to really work as a team. And so that’s part of the objective that we have today too is to allow you to see that team in action. So we will spend the next 45 minutes both answering questions that you have already posed to us, and we will take those on. And then we will also open it up to your questions. So with that, let me ask the panelists to come on out and we will get started. So panel come on out. Thank you. Please welcome them.

Terrific. So while they are getting settled, let me just do some introductions. I think you probably have a good sense of who these folks are. We have Julie Larson-Green, who leads our Devices and Studios Group. Welcome, Julie. We have Satya Nadella, who leads our Cloud and Enterprise Group. We have Terry Myerson in the middle, who leads our Operating Systems Group, and that’s across PC, tablet, phone and Xbox on the Operating Systems side. We have Kirill Tatarinov, who leads Microsoft Dynamics and has for many years. And we have Qi Lu, who heads up our Applications and Services Group and that now includes Skype and Office. So I think we will touch on a number of those topics as we go through this.

Alright. So I am going to dive us right into the questions that came from you all already. And I think some of these questions came from several of you, but let me kick it off. So the first question came in various forms. I am going to use a question from Kirk Materne of Evercore. And he asked the following, what is the general thought in terms of the availability of some of Microsoft’s key productivity apps, he notes Office and Word specifically on iOS, specifically the iPad and Android devices? How do you decide strategically what to ship and on what operating system? So Qi, that is definitely for you.

Qi Lu - Head, Applications and Services Group

Thanks, Tami. Thanks for the questions. So strategically we use a combination of two factors to guide decision makings on what to ship on what devices and on what timetables. The first factor is customer interest and customer experience. It is quite important for us to ensure that there is genuine customer interest, customer needs, and at the same time we can also deliver a quality experience that serves our customer needs. The second factor is economics, and financially it has to make sense for Microsoft. So those are the two factors that guides our decision-making. So for example, we have developed versions that are touch first for tablets for some products in our Office suite, Lync and the OneNote. And we make those products available on non-Microsoft devices such as the iPad. Now all set the Office suite will also have Skype and the SkyDrive, and they are available on Android and iOS devices. But within the Office suite today we have versions of products that are designed for the desktop, for mouse and the keyboard. They are available on Windows and on Mac. And they are touch-enhanced for Windows, but they are not designed to be touch first. And then we have Web versions of those apps available across all the devices, and those apps are also available via Terminal Services.

Now, we are working on touch-first versions for our core apps in the Office suite, Outlook, Word, Excel, PowerPoint, and we will bring these apps to Windows devices, and also to other devices in ways that meets our customers’ needs, and the customer value of those experiences, and in ways that economically make sense for Microsoft, and at a proper timetable. So, that’s how we think about making these decisions as the question is being posed.

Tami Reller - Executive Vice President, Marketing

That’s great. Thank you, Qi.

Satya Nadella - Executive Vice President, Cloud and Enterprise Group

And I will just add that on the enterprise infrastructure, we have been living with these principles for a long time. And if you look at where we are with the hypervisor, we support both Windows and Linux. When it comes to the System Center and the ability to manage a variety of virtualization infrastructure, there are many customers who today use System Center to manage even ESX from VMware. When it comes to device management, we in fact, have our mobile device management in System Center and Intune that manages Android, iOS, and Windows devices. And then on the development side, again, Linux is a runtime. We have Java support. So we have a pretty open way to go about both infrastructure products and developer products. And it really stems from the same principles that Qi talked about, and also the fact that enterprises are heterogeneous, and we recognized that and so that we are executing on that strategy.

Tami Reller - Executive Vice President, Marketing

That’s terrific. Thanks Satya. Thanks Qi. I would also note that Kevin Turner had a slide in his deck that really highlighted our offerings today on that front, and so that’s another good reference point for those interested there. So our next question we also get a lot. We got a lot in submissions for today as well. This one came from Hari at Neuberger and asked, how are you going to make progress toward a common development platform across multiple screens, specifically phone, TV, PC and tablet? So, Terry, that obviously is right at you, and I know this is near and dear to your heart.

Terry Myerson - Executive Vice President, Operating Systems Group

Thanks. We have been together, brought all the OS groups together at the company for about two months now. And we really haven’t been wasting any time in terms of organizing all of our efforts in the operating system area around three key beliefs.

The first of those is that we really should bring – we should have one silicon interface for all of our devices. We should have one set of developer APIs on all of our devices. And all of the apps we bring to end users should be available on all of our devices. The second belief was that all of our devices are becoming more cloud-powered. So whether we are branding them Windows or Xbox, we really need one core service which is enabling all of our devices. And the third belief was that each of our devices require a tailored experience to be really special for the customer. Whether that’s a three-inch phone, or it’s a 9-inch tablet, or a 14-inch clamshell, or a 60-inch television playing Xbox games, we want to facilitate the creation of a common, a familiar experience across all of those devices, but a fundamentally tailored and unique experience for each device.

So our team is now organized in this way. We had a core team that will bring those silicon interfaces together, bring those developer platforms together, approach delivery of apps to the customers in a common way. We have one team delivering the core services that will light up our devices. And then we have satellite teams each focused on each of the device categories, so each of them can be reflective of what the customer expects in that place. We got a very clear vision of what we want to get done, and we are moving very fast.

Tami Reller - Executive Vice President, Marketing

Great. Thanks Terry. And I am going to jump in with another quick follow-up directly to you, because I do know it’s on the minds of the people in the room. And that is, can you talk a bit about the role that Windows RT plays going forward, how do you think about that as you just described the vision?

Terry Myerson - Executive Vice President, Operating Systems Group

Sure. So we have two very important chipset families in everything we are doing in all of our devices and that’s X86 and ARM. The ARM devices in particular in phones have incredible share due their battery life and the connectivity options available with the systems on the chips on the ARM ecosystem. Windows RT was our first ARM tablet. And as phones extend into tablets, I expect us to see many more ARM tablets, Windows ARM tablets in the future. With regard to Windows RT 8.1, which really is two significant new improvements this year. The first is that Windows RT 8.1 supports the next generation of ARM silicon. So it’s really got great performance characteristics. And secondly, the full Outlook experience is now available on Windows RT. So with the full Office – the full Office suite is now available for the customer.

Julie Larson-Green - Executive Vice President, Devices and Studios Group

When we came up with Surface, the idea to do Surface, and that tablet it was really about bringing the best of a tablet and productivity all in one thing. And we still really believe in that vision and going forward. We have learned a lot, where 8.1 adds a lot of capabilities and gets us closer to that vision. It was a V.1 and that we are committed to going forward with that.

Tami Reller - Executive Vice President, Marketing

That’s great. And, in fact, Julie I’ll probably go to you next and ask you some Surface questions, which I know are in the room, as well. We have a Surface event next week, so obviously that will be a time for us to talk more about the future. But if we say what have we learned from what we have done so far, and how are we thinking about how that’s informing how we are going forward?

Julie Larson-Green - Executive Vice President, Devices and Studios Group

Sure. And we are very committed to creating great first party hardware and continuing what we started with Surface. I think what we learned a lot is that you need to have balance to be successful in the market. So you need to have the combination of great hardware, great software, apps and services in order to win. And we learned this with Xbox, when the first Xbox came out it was hardly any games, it took a while for us to get going with it. And we are very optimistic about what we are doing in terms of the changes that are being made in the software, the applications that are coming online, the services, and improving the hardware, both in terms of speed, performance, and the integration with the software. Now something mature like, say the PC market itself, Surface Pro we saw the uptick on that very quickly, because it was a mature market with a mature software, and with a mature set of services. So I think we are learning about the nascent part of trying to create this kind of Surface holistic device and we are going to continue forward. And we have a lot of things to announce on Monday that I am excited to talk about.

Tami Reller - Executive Vice President, Marketing

That’s great. Thanks Julie. And then part of that balance is clearly our ability to execute in the market, and that’s something where we continue to just tune and get better and learn and it is making a difference. And so in addition to all of the product work that we are doing, both on the hardware and the software, again we just continued to get better and better execution at retail and with our commercial customers in executing on Surface.

Julie Larson-Green - Executive Vice President, Devices and Studios Group

And in particular we are seeing a lot of uptick with students who want that user simplicity, the productivity of the tablet, but also the entertainment and communication that comes with that.

Tami Reller - Executive Vice President, Marketing

Yes, definitely one of the fastest growing segments there. So that’s terrific. Alright, so Kevin did a terrific job talking about enterprise and our execution there, our opportunity across enterprise and so let’s talk enterprise, panelists. So it seems like not that long ago that people would say that Microsoft was even credible in the enterprise. So clearly with all those statistics we saw from Kevin no one is saying that now. So we are going to start with you, Satya, and I think there’s one part of our business in the enterprise that’s definitely been on a roll, and that’s our SQL business, which I know you love talking about. So we have got several questions around this, but let me phrase it this way. Can you continue to outpace Oracle, and how will the big data trend really impact Microsoft going forward?

Satya Nadella - Executive Vice President, Cloud and Enterprise Group

Yes, I mean the SQL business is just an amazing business for us. I mean this last fiscal year we crossed $5 billion mark and we grew 15 points, which is what 3x Oracle, and 2x the market. And so we are now – I mean we’ll always add usage share leaders, but for the first time now sort of revenue share is growing and Kevin referenced that. And so we have crossed IBM in revenue share and we are gaining share versus Oracle even on the revenue share front. So that’s just a fantastic growth story for the company. But the story behind it is the technology and what’s happened is we’ve become much more competitive on the high end. So SQL Premium growth is being fueled by the fact that we have all time peaks in terms of mission-critical workloads coming onto SQL. And then we lead when it comes to self-service BI. So on the edge, because you have lots of data doesn’t mean you have insight. So in fact, it leads to fueling of the warehouses on the edge, and Excel, and SharePoint, and so that loop is something that is really vibrant for us and we see the growth. And we are adding to it.

So we have now added Hadoop capabilities in Azure as well as the distribution for Windows Server. This cloud BI, our Power BI service is just an amazing service for us. It’s got natural affinity to both Azure and Office 365. So we are very excited that’s going to launch now. And then SQL Server 14 is going to be a pretty big step forward. It’s going to have an in-memory database, which we have always had when it comes to analytics now in the core engine. So that means you are going to see something like 7x, 10x increases in speed of your core OLTP applications without having to rewrite them. And that I think is going to be a very, very important value proposition that resonates with our customers.

Tami Reller - Executive Vice President, Marketing

Perfect, thank you. So Terry, how about Windows and the enterprise, what are you seeing?

Terry Myerson - Executive Vice President, Operating Systems Group

With Windows, we are continuing to see strength and commitment from the enterprise. Kevin talked about our progress in migrating customers off of Windows XP. Now, we have 75% of all enterprise desktops running Windows 7 and that contributed double-digit growth in the Windows volume licensing business contributing over $4 billion in revenue last year. The Windows 8.1 release that’s becoming available now has had a strong focus on the enterprise both bringing back sort of the familiarity of Windows for productivity work, bringing back start button, revitalizing the desktop for that core Office user, but also focusing on innovations for the enterprise, great improvements in biometrics for customer IT departments that are looking at adding that layer of security. We also have some great work to support the IT challenge by bring your own device trends, supporting remote business data wipe on all Windows 8.1 devices. So with everything we do in Windows, we have this focus to making sure that Windows is that great enterprise desktop for productivity work, as well as any other form of desktop deployment that an enterprise might have for data entry kiosks, whatever it might be. We want Windows to be that most secure, most manageable lowest TCO way to deliver that desktop experience.

Tami Reller - Executive Vice President, Marketing

Great, thank you. Qi, I will ask you about Office 365 in business, what are we seeing?

Qi Lu - Head, Applications and Services Group

Yes, we see tremendous momentum for Office 365. And just to build on what Satya said, Terry said, I believe KT also talked quite a bit about it, we are growing at a very, very rapid pace. And last quarter our run rate was about $1 billion annual run rate. Now, this quarter it’s already moving up at the run rate of $1.5 billion annual run rate and it’s continued to accelerate. It’s very, very strong. And it’s available in 125 markets already. And over the last 12 months, among small and medium-sized business we grew 150%. And some of the specific products, for example, Yammer, now it’s fully integrated as part of Office 365. Worldwide, we have over 200,000 organizations signed up for using the Yammer, and there is more than 1 million registered users for that products, it’s social fabric for our future generation of enterprise productivity suite delivered through the cloud. So there is tremendous momentum.

There is a couple of things I do want to emphasize on this. One is the way we can drive product innovations for the generations to come, because that’s part of building of cloud. And we have this concept of evergreen customers, because in the on-prem world upgrading to a new version to get new features is so hard, a lot of work. Now anytime we ship new innovations all our customers gets the benefit immediately. But even more importantly, the cloud you can observe what a customer does immediately, the pace of innovation picks up with cloud-scale infrastructures and the machine learning capabilities. There is so much more we can drive based on what we learned from our enterprise customer base to drive future product innovations.

And one more thing I want to emphasize is the engineering muscles, and this is truly one of the great stories that are unfolding because our engineering teams is going through this massive transformation. They have deep know-hows, years of knowledge on how productivity works, how enterprise workloads work, how our customer use our products. Now, we are going through the hard journey of moving them to the cloud and building strong service muscles. And we are going through the transformation so that you technologically go to next generation, but our customers are going through this very smooth migration path. So the net, this is truly a strong, strong locomotive. I really want to leave with you with that particularly important concept. It’s a very, very strong locomotive with lot of growth on business. It’s going to be a future earning for Microsoft with a lot of power and with engineering muscle, with new way of driving innovation for enterprise. And this locomotive can carry many strategic payloads for our company for years to come. So it’s quite exciting for this to happen.

Tami Reller - Executive Vice President, Marketing

Great. Yes, thank you all three of you. And Kirill, maybe I will ask you a two-part question. Terry talked about 8.1 for enterprise and the focus there. I know that probably means something to you as well. And then I will also ask you about cloud-based enterprise apps and where you see the future there and how you think about that for the growth of dynamics and what opportunity you see?

Kirill Tatarinov - Corporate Vice President and Head of Business Solutions Group

Right. Well, it’s a tremendous growth area for the company. And as Kevin noted earlier today, we have pretty phenomenal assets in the market and we have also – we also see tremendous opportunity for the future. Dynamics CRM was essentially one of the first services we delivered in the cloud to the enterprise in a way it blazed the path to all of the Microsoft moving into the cloud. Dynamics CRM also pioneered our approach to the cloud, where essentially our customers can run the same solution, from fully multi-tenant Microsoft cloud partner hosted also deployed on their own services and private cloud on-premises. Now, today two out of three new customers choose Microsoft cloud as their preferred deployment option, but those customers also tell us that, that choice is very important to them, especially those customers who got burned by salesforce.com and switched to Dynamics CRM tell us that. Now overall Dynamics CRM business has been tremendous growth story, 36 consecutive quarters of double-digit growth, over 40,000 customers, 3.5 million users, it’s a growing business at scale and we are really proud of what we accomplished there. We are also proud and excited about the opportunity to take share from all of Oracle and salesforce.com in that market.

Now in Dynamics ERP which in and of itself is over $1 billion business for us today. We actually see small organizations increasingly looking for cloud as a deployment option. And that’s why we have Dynamics GP and Dynamics NAV, our SMB solutions now delivered on Azure with our partners, who essentially put their industry vertical solutions on Dynamics on the Windows Azure platform, great win for platform, for our applications, for our partners, for our customers and yet again, it’s a full flexibility of the mode of the deployment. And next year our flagship Dynamics AX will be offered in the same manner for larger organizations. So overall, I would say it has been a great story.

Windows 8 is tremendous opportunity for us to bring business solutions in a modern application fashion to the enterprises. In fact, next month Dynamics CRM 2013 which is a major user experience release for us, a major push in this modern applications, will be delivered. It will run in this native modern app fashion and we have received tremendous feedback from customers and partners who have seen this application. So it’s a great business as increasing number of our enterprise customers add Dynamics to their line-up of products from Microsoft, we see our role as trusted advisor to the enterprise getting much stronger. We see our overall share of wallet in the enterprise grow very significant and overall opportunity for growth is phenomenal.

Tami Reller - Executive Vice President, Marketing

That’s great, that’s great. Thank you very complementary to what Kevin talked about in terms of trusted advisor. Alright, so Rick Sherlund had a question which is also on a lot of your mind and that has to do with apps. So as a leadership team this is something we talk a lot about for sure, but Terry, I will have you take this one. And maybe start by talking about some of our progress and how we are thinking about the opportunity ahead? I think talking about both would be good.

Terry Myerson - Executive Vice President, Operating Systems Group

Well, as Tami said, this really is a significant area of focus for our leadership team and my team in particular. We understand where we are at. We have a plan. We are making progress, and we think we are going to be a leader here as we execute our plan. The signs of progress are pretty significant there. With Windows Phone, we now have 49 of the top 50 apps. With Windows 8, we are seeing great apps, which really take advantage of the platform from great brands, Facebook app, Twitter app, Foursquare app really taking advantage of the Windows 8 platform as they bring their apps to both tablets and PCs.

Our developer programs just keep growing and keep getting better. We just released Windows 8.1 to the web. Great tools are coming, which really facilitate differentiated apps being built very efficiently. We just had our developer conference in San Francisco. Thousands of developers came to learn how they can take advantage of the platform. We are lowering our fees for developers, introducing competencies for developers to recognize publicly those ISVs that have shown the capability to produce great Windows apps. So we really are working our (indiscernible) on this locally, globally. We are looking at all of it. We are looking at domains for ISVs. We are looking at consumer apps. We are looking at enterprise apps. We are looking at how the virtuous cycle works on other platforms, how it should work on our platform. And it really is a top priority for me and my team and we are working it.

Satya Nadella - Executive Vice President, Cloud and Enterprise Group

So one thing I would add is when we think about the platform as Terry and team are working on even bringing all our client platforms together and the tooling around it is in fact going to facilitate a lot of the sharing of the assets for the developers, which is very, very important for us. But there is no application that gets built today in the enterprise or in the consumer space that doesn’t have a huge cloud element. In fact, even Office 365 is a programming surface area. So we are really building out our tooling across all of our assets and enabling these developers to exploit our broadest platform. And I think that’s another source of innovation around our platforms that I think will translate into sort of unique app experiences for our platforms.

Julie Larson-Green - Executive Vice President, Devices and Studios Group

And we have all that work going on for our game developers as well to take advantage of the cloud. So multiplayer gaming is incredibly important and you have these very powerful endpoints that people can play their games on, but you need the truth in the cloud, and so Azure now helps developers take advantage of that and create these very high-quality applications that can use the power of the cloud both for state and keeping a sense of the universe between these multiplayers but also to offload computing.

Tami Reller - Executive Vice President, Marketing

Great. And speaking of Azure that was also a common question through all that you inputted, Brent Thill had this one. He said how will you differentiate your cloud infrastructure versus Amazon’s? So Satya, that’s yours.

Satya Nadella - Executive Vice President, Cloud and Enterprise Group

Yes. So when we think about Azure, in fact, Qi said it well when he sort of started talking about Office 365. We really don’t conceptualize Azure in its isolation. In fact, we think about the Microsoft cloud as Office 365, Azure, Dynamics, all coming together. If you think about it, any customer who has signed up for Office 365 effectively has also signed up for Azure, because the Azure AD or the Active Directory gets populated for every tenant of Office 365. SharePoint extensions, so you build a SharePoint application in Office 365 while its extensions are in Azure. You buy any of our server products, you get Azure with it. So you have backup, you have Hyper-V replica for disaster recovery.

If you buy SQL Server, you can have read-only secondaries in Azure. You get Visual Studio, you get to do source code control in the cloud, you do build in the cloud, project management in the cloud, and not only that, we also package up all of what we do in Azure as part of our server product. In fact, that’s what’s driving some of our server products’ premium growth in build-out of private clouds because we really want a vision where distributed computing will remain distributed going forward. And that means we need to be able to even support people who want Azure functionality in their own datacenter. So we are pretty unique in all of these fronts when it comes to in comparison to Amazon. In fact, Amazon also carries a bunch of our workloads and is a reseller of some of our workloads. But as far as we are concerned, it’s about really coming, bringing the assets I talked about together in unique ways for both IT as well as developers.

Tami Reller - Executive Vice President, Marketing

That’s great. Good. Alright, I have got one more question that I am going to ask of you. So I will tell the audience that if you want to think about questions, we have microphones that will come to you, so if you just raise your hand. When you ask your question, if you wouldn’t mind just standing up so we can see you and introducing yourself briefly that would be super helpful. So get ready. This is the last question. We have got a number of different questions asked in a number of ways, but essentially all asking about the Nokia deal and how we are thinking about that. And so no surprise that, that’s of particular interest. And so maybe we will tackle this in a couple of different ways. Terry, I think it would be good for you just to talk about it from an engineering perspective. You are closest to that, have been closest to that team. So what will be different, how do we think about what the advantages will be having the team part of our team?

Terry Myerson - Executive Vice President, Operating Systems Group

Well, I am pretty excited about having the Nokia folks as part of our team. It’s really just from the point of view of accelerating innovation, and really trying to produce these really epic devices. When it comes time to collaborate on creating these great devices with any of our partners, which is what my team does. It works with all of our partners to try and bring the innovations on to Windows. There is times where you get to that hardware/software boundary where sometimes having two companies, there is just the company boundary gets in the way of the collaboration. And we are moving that seam. I mean, we have this proven ability to work together with the Nokia team. It’s a great team. But sometimes that seam between the companies has slowed progress or sometimes hindered and what we could get done. And so removing that seam I think really will enable new things and not just for the first-party devices from Microsoft, but also as we invest in that software, all of that software makes its way back into the platform, at least the platform components, which we then make available to all of our partners. So I foresee even better, more compelling, more innovative hardware support coming from our platform and more epic devices coming from Nokia as a result.

Tami Reller - Executive Vice President, Marketing

Great. And I think on the integration side I would just remind folks that at the time we announced the deal we actually had integration executives that had already been named and have been mobilized. And so we think that’s a great running start just to make sure that everything is successful once everything closes. On the marketing side, I think we have tremendous opportunity to not only be more efficient, whether it’s sort of brand synergy that can just be cleaned up and taken care of or whether it’s just more effective marketing, because the teams are working together and really going after this family of devices that we talk about, this Windows family of devices.

Julie Larson-Green - Executive Vice President, Devices and Studios Group

Well, I think it actually says a lot about improving our commitment and capacity to hardware. I don’t know how many of you know, but one of our very first hardware products was in 1980 called SoftCard, and not too long after that in 1983 we did the Mouse. And those are always in service of completing a software experience. And now we have the opportunity with the acquisition of Nokia to go and do a hardware first based experiences and really deliver our software and services through the hardware. And so instead of kind of turning it inside out, instead of being in service of the software, the hardware is leading where we are going to go in innovation.

Tami Reller - Executive Vice President, Marketing

Great, thank you. Alright, it’s up to you now. Questions, and we have got numbers and I think I will just go to those numbers. So number two.

Question-and-Answer Session

John DiFucci - JPMorgan

Hi. It’s John DiFucci from JPMorgan. I have a question for Kirill. Kirill, I know you don’t break out the Dynamics business within MBD, but along the way some of the information that’s been given by Microsoft gives me the idea that you have had significant growth in this business. I guess since it’s the time of change at Microsoft, even with that growth, the way you depend on the channel not only for sales and implementation, but even support, I wonder if that business can ever be meaningfully profitable. So since it’s a time of change, has there been any thought to go-to-market strategy for the Dynamics business, at least to I don’t know if any channel partners are listening, but taking some of the support back, which is hugely profitable?

Tami Reller

So Kirill, it sounds like just a good straightforward question.

Kirill Tatarinov

It sounds like it’s directed right at me.

Tami Reller

I think it’s you.

Kirill Tatarinov

And I know this group has been asking the question about profitability of Dynamics business for the longest time. And I can only ask that I am quoting you this business is meaningfully profitable and there is a way to run this vibrant partner channel that we have, channel that is really an envy of all of our competitors. There is really a way to run that channel at scale and at the same time run this business as a profitable business for the company.

Tami Reller

Right.

John DiFucci - JPMorgan

(Inaudible) of the corporate overhead, it’s still I mean…

Tami Reller

I mean, our channel has given us scale and growth.

Kirill Tatarinov

And our channel has given us an amazing marks. Our partner satisfaction in Dynamics has been growing dramatically in the course of last two years and it’s actually at its peak right now.

Satya Nadella

And every Dynamics sale is a sale of our entire stack of Microsoft and that channel is a pretty vibrant channel for a lot of our infrastructure products as well.

Tami Reller

Great, thanks John. Let’s go to one.

Walter Pritchard - Citi

Hi. Walter Pritchard from Citi. Just wanted to follow up on the first question that was asked about the Office business or the MBD business, and you talked about the strategy around moving that to other devices. And I think most of us would argue here that really not a first class – the other devices aren’t really first class citizens for non-Windows devices with those properties. And I think everybody uses iPads Notes. You know there is new information worker type applications being used whether it's Evernote, Dropbox, whatever it maybe, and you put up stats showing SharePoint and all these businesses growing nicely, but it does feel like under the covers there is kind of a groundswell of a competitive alternative building around your MBD sort of stack of products for lack of a better word.

And I am wondering how you think about it, I understand how you are thinking about it. You explained it earlier, but I guess the risk in my mind is five years down the road you may find yourself in a situation where there has been sort of a competing ecosystem that’s been built and is now heavily entrenched, maybe fragmented, but heavily entrenched in this area. And the slower you move with your own products as first class citizens on those platforms, the more you will sort of build that competitive ecosystem. I’m just curious how you think about it from that perspective because we hear quite a bit of that thought process from investors?

Tami Reller

Well, I mean, I do think that the way that Qi outlined it at the beginning really does describe how we think about it. We think about it from a customer perspective and we think about it from the economics from Microsoft’s perspective. And that will always be the lens through which the team looks at it. Qi also added in timeline. We just – we will make sure that when there is a time for us to talk further about the roadmap, we will make sure we do so. But I think you covered everything in your first answer on that one. Alright, I will go to four.

Kash Rangan - Merrill Lynch

Hi. Thank you very much. Kash Rangan at Merrill Lynch. Sorry, can you hear me?

Tami Reller

Yes.

Kash Rangan - Merrill Lynch

You wanted me to stand up. Okay, let me stand up.

Tami Reller

Yes.

Kash Rangan - Merrill Lynch

Kash Rangan at Merrill Lynch. Thank you so much. My question is directed to Qi and Terry. Maybe you could talk about what exactly you are seeing with respect to the re-org. I mean, that’s a pretty big step. It doesn’t happen that often. How are you handling and coping with this, what are the specific actions you are taking in your individual businesses as far as the re-org is concerned. And secondly, if you could just comment on both you come from more of a consumer background, but you are going to be running enterprise scale products as well. And historically the issue that investors have and I also have thought about is the enterprise, you’ve got enterprise tech companies, you’ve got consumer tech companies. Only Microsoft tries to do both. And I wonder what thought is given to being able to release products at the right cadence for the enterprise market while not missing the beat on the consumer side. It would seem to be a fairly complicated exercise and you’ve got a wonderful opportunity but I wanted to get your thoughts on that? Thank you.

Tami Reller

Alright. Nice job packing a lot into one question. So let me maybe start with you, Qi, and get more focus on the first part, and then we can expand, which is how have you gone about really operationalizing the reorganization. And at a high level I would say as a common theme across this entire lineup is there has been this balance which Terry talked about, which is executing on current business and product delivery while we get ready to set up to really take the next big transformation. So do you want to bring that to life, Qi?

Qi Lu

Yes. That’s a terrific set of questions. So I will just take maybe three parts to briefly comment on each of the areas. First is with regard to this re-org. It’s important for us to remind there are three key components for my new groups Office, which is really the productivity suite, on-prem in the cloud, clients and services. The second is communications, Skype and Lync. And the third is the search engine information category suite of products. And they are very much having a commonality why these groups fit together, because if you take a step at the high level, as KT talked about, our company’s focus is to deliver high value scenarios, to enable our customers, our users to do things that really they care about, of high value to them. And that central theme is to enable our customers to be able to get more done. Do more is the theme. And certainly Office is at the center of do more. And we always do things in conjunction, in combination of collaboration with somebody else. So communications always is also at the center of do more activities, high-value scenarios.

And then what about Bing and it’s important to emphasize Bing from the get-go, we took a different point of view. We said people search with a purpose in mind. You never search just for search sake, you have something, some purpose, some task in mind. So we want to change the search paradigm, drive innovation so that we enable our users to get things done. And there are infrastructures, there is data, there is machine learning. All these assets can come together to truly enable us to deliver the next generation workload. So that’s the common themes.

With regard to how they all come together, it’s a combination of the two. So each of our teams, they all have a strong roadmap. We ask all the teams to stay focused, full speed ahead, because we all have strong, strong products in the org and I want to ship all those. At the same time, we do need to work together in a thoughtful process to say how these assets can come together in a very, very organic, coherent way so that we can truly deliver the next phase of high value experiences. So we are in the midst of going through all those activities. The teams stay focused and my leadership team, myself, we spend a lot of time to come together to say what are the new opportunities in front of us we can do. So that’s on the re-org side.

And I’ll also maybe briefly cover the previous question about what about the new scenarios, and that’s really on our radar screen. We watch very, very closely about what’s going on in the Silicon Valley. For example, there is a lot of startups innovating the new type of productivity scenarios. We pay full attention to all those, because we believe these are our opportunities to take our current core customer base and not only take that customer base and give them new experiences, but enable us to find, discover those new scenarios that you can use phones, tablets, using natural interaction models to have different ways of doing productivity scenarios, whether it’s note-taking, meetings, communications, expressions, reading. There is all kinds of different opportunities on our radar screen. As part of this all comes together we really think there is great opportunities for the new org, in particular in collaboration with Terry’s team and Satya’s team to take that on.

So one last thing I do want to briefly comment about, the leadership question that you mentioned, because Terry and I, as you said, come from more of a consumer focused background because we have been building products in those areas. And the simple thing I would just briefly mention is one is you always start with a strong leadership team. I can say this I am truly blessed with very, very strong leadership teams, truly fantastic. They are all well-versed in enterprise workloads, and I learn a ton. And as I said earlier Office 365 is one of the – such a powerful locomotive that would drive many generations of new enterprise products for years to come for our company.

And I spend a lot of time reviewing with technologies, working with the teams, because learning is important. It’s always about teams, and I would learn as much as we can, because it’s core to our company in the future to have strong, strong cloud infrastructures, strong, strong way of focusing our businesses on the enterprise side. At the same time, it’s always about building strong teams so that the collective wisdom, the collective experiences, particularly in partnership with people like KT, Kirill and Satya, they all have a lot of enterprise experiences. So the net of it is learning as fast as we can, on-boarding, work with the teams and unleash the team collective power so that we can truly deliver the next generation of high value experiences and take our products and the businesses to the next level. That’s at the high level to kind of answer your questions.

Julie Larson-Green

If I could add on to that, one thing – I have been at Microsoft for 20 years, and one thing that is different is just the leadership team that is up here and how we are working together. And so we are all invested in each other’s success and need to work together to deliver these high value experiences across a set of devices to our customers. And so we are working in a new way. We all have various amounts of enterprise experience. Terry worked on Exchange, I worked in Office for a third of my career. So we all have things to offer to each other to help us be stronger in our own individual parts that we are working on, but how it comes together is really where we see the magic and the synergy going forward.

And as far as getting into the enterprise, we do believe that consumers drive a lot of what’s coming into the enterprise. When I was in Office, Excel was brought into the enterprise because consumers liked Excel and brought it in over Lotus Notes. We see the same thing – we have seen the same thing with the iPad. Consumers have the iPad and bring it into the business. So we think these end points of these desirable, high quality devices, combined with the power of our high value scenarios and services is what’s going to propel us forward into reaching customers the way we would like to.

Tami Reller

Great.

Terry Myerson

This is sort of ironic for me because I think five years ago at FAM someone walked up to me and said, you are an enterprise guy, why would you be working on phones now? So it just shows I think there is so much about – at least it’s true of pretty much so many things, whether it would be the applications or the devices, it is common between the consumer and the enterprise environment.

Julie Larson-Green

We make products for people.

Terry Myerson

Yeah and it’s really the key thing. I think that so much applies to both, whether the user experience, the reliability, there is just a lot common across there. And so I think we are fortunate to be able to apply both domains across. And certainly for Windows, Windows is very much an enterprise product I would say, and it is very much an end user product. There is so much of our effort, the Windows we build is used on the client, it’s used in the cloud, it’s used in datacenters. And so having that diversity is essential to delivering the Windows franchise for Microsoft.

Tami Reller

Great and that was a rich question. You asked about cadence, and clearly 8.1 is a good example of what a great cadence can get. Let me go here and then I’ll get to these 3 questions. Number one?

Phil Winslow - Credit Suisse

Hi. This is Phil Winslow of Credit Suisse. It’s a question for Qi. I appreciate the fact that some of the learnings from the consumer internet side have helped probably things like Azure and the build-out of that, but when you think about the profitability of the OSD division on a standalone basis, couple of FAMs ago, you gave out this target of maybe you hit 20% share and that’s when we hit breakeven in OSD. I am wondering if you could just walk us through what’s sort of the new thinking sort of the path to profitability is there and sort of what targets we are going to hit or just high level, just kind of how you think about that path? Thanks.

Tami Reller

Maybe very high level, Qi just given time just a high-level view.

Qi Lu

Yes, so just briefly, we are making good progress. Thank you for the questions. One is we are gaining shares. Number two, we are driving innovation, so we have a set of product ideas we think truly differentiate our search experiences. In Windows 8.1 for those we haven’t tried it we have a complete new way of seamlessly integrating search with information enriched on the devices. Terry’s team, Julie’s team used to be our former teams we are able to build that. We have very good set of ideas to truly disrupt today’s search model. But your question is about profitability. For my organizations, we are hardcore. Essentially we are absolutely committed, always monotonically making progress towards profitability (indiscernible). Volumes we are gaining share, we obviously have more volumes, great. Last year, one of the best stories for my division is we are growing year-over-year at very, very high percentage. Finally, our R&D, our product, go-to-market truly coming together, we are growing our search rate at the very rapid pace. So great question, the team is hardcore executing. We have full confidence we are going to get there.

Tami Reller

Good, thank you. One last question, we’ll go to two.

Ed Maguire - CLSA

Hi. It’s Ed Maguire from CLSA. You have articulated how you have harmonized all of your enterprise services, so it’s actually very simple for your customers to move from one product to the other, but in the consumer, there are lot of different constituencies, Xbox, Skype, you have the Windows Store, a lot of different ways to get your services to consumers. And I am interested how the team is thinking about harmonizing that experience or getting a more consistent experience across all of your different offerings and how you can tie that into a business model that may go beyond devices where you control the platform?

Tami Reller

You want to take it? Yes, Terry, do you want to maybe take that one?

Terry Myerson

I can try to start.

Tami Reller

Yes.

Terry Myerson

I mean, we want over the family of devices with a family of services. When we think about delivering that family of services that really is we approach that bottoms up and top down. Bottoms up, we are embracing Azure in everything we do, and Azure broadly defined, that brings with it a number of capabilities, which actually project all the way out to the end user. Likewise coming out top down, adopting common design language, adopting common navigation, adopting common taxonomy, we are absolutely committed to that and are making great progress across all the application and services we build. And so Skype just joined our family recently. Bringing that in, I think the integration has actually gone fabulous in terms of that technology and that team, but it takes a little bit of time to integrate an asset in that scale. That’s how we are approaching it and we are making good progress I think.

Tami Reller

And as we go to market, we really think about consumer services. The Skype CMO is now the CMO for all of our consumer services and really thinking about how we make that more seamless as we go to market as well, so a lot of opportunity.

Satya Nadella

The one thing I would sort of say is I think, this was referenced earlier, but there is this graduation process right, which is from consumer to enterprise that is actually the thing that we are probably the most focused on, which is what does it mean to have SkyDrive, SkyDrive Pro, what does it mean to really have these experiences where there is viral adoption even in the enterprise of our consumer products. And that’s a place where things like Yammer has taught us a lot and that’s something that I think you will see in a lot of our product design. This notion that this is an enterprise product and this is a consumer product I think is not the way we will approach things. We will think about these products as sort of meeting end user needs and enterprise IT needs and how to balance that.

Tami Reller

Great. Well, please help me in thanking our panel. Thank you to Qi, Kirill, Terry, Satya and Julie. Thank you very much guys. I also want to thank you for the questions that were pre-submitted and the ones we were able to get to here. These guys will join the reception. So I know you may have some additional questions, which I invite you to ask them at the reception as well. So it is now my great pleasure to introduce our next speaker who I would say has hit the ground running as the Microsoft CFO. She is a terrific partner to marketing, very pragmatic and hands-on, which I think you will see. So please help me in welcoming to stage Amy Hood. Thank you.

Amy Hood - Chief Financial Officer

Thank you. Thank you. Hi. I have to say I wasn’t envisioning a power outage when I thought about things to be worried about in our communications with you guys today. So thanks for your patience as we worked through that. You know, I do have a lot of ground to try to cover in 30 to 40 minutes, but I wanted to start out by saying this is the first step. It’s the first step in how we communicate the transition we are going through. It’s the first step in how we communicate the accountability we see and feel with the business and I feel. And so I want to sort of set that groundwork before we start.

Really, I am going to give a little bit of an introduction. A little bit to me and a little bit about how I think you should expect and hear from me and how I talk and accountability. And I think rather than telling you math numbers, it’s probably one of the most important ways we have to start building our relationship. So I will take a few minutes to do that. Then no fear, we’ll dive right in, talk about business model transitions and try to give you two good examples that you have been asking for in terms of helping you know where now we were making progress and be able to see it more clearly and understand the gross margin opportunity we have in that transition. And finally, I will talk about the changes we are going to make to our reporting segments. To give you more insight and accountability in terms of the new businesses we are getting into and the gross margin profiles of those businesses.

So with that, let me kick off. I am probably not the first CFO to stand up and say I am focused on shareholder value. So let me tell you uniquely what that means to me. At Microsoft and at many tech companies, the greatest shareholder value has always been created by great innovation, where technical innovation and business model innovation come together. The thing I called that is strategic resource allocation. That’s a word a finance person uses to say, invest in the right places where you see those opportunities and do it thoughtfully, prioritize, look at ROI, look for economic value and invest behind it. And second is really about more of the short-term. If the first is the long-term and how you create the most shareholder value, it certainly should also be noted that day-to-day execution and excellence and operational and financial management matters. It matters is about execution. Achieving great technical and business model innovation requires great day-to-day execution. You don’t have to just do one or just do the other at a company like this.

And of course, cost discipline, I think about cost discipline as really being how do I get the most out of every dollar we spend. The reorg is a great example. We are already seeing it by making centers of excellence otherwise known as a functionally organized team. You can see even after a few months where we are making a greater impact. You saw some of the ads. Our ads are already more consistent. You think back a few years, you probably would have seen three ads in succession, not terribly related to each other. The ads you are already seeing after eight weeks are about one single Windows experience, one single consumer experience. And capital return, earlier this week, we announced a 22% increase in our dividend and a $40 billion buyback program. I think you will continue to see that as a key focus. I know it’s a priority for you. It is certainly a priority for me and for the board and for the company.

Now, let me turn a little bit to me, not the company. I want you to know what to expect day-to-day from me. Engagement, I think if you ask a lot of people inside the company, they would probably make the same list for me. So you should know I am probably the same here as you would find me in my office a mile or two away. I do believe in engagement inside on product plans, capacity planning. I believe in meetings to make decisions, to drive outcomes, and I also believe in engaging with you all in a consistent way.

Decisiveness, in a business that changes as quickly as ours, being able to make thoughtful, but quick decisions is important. It’s my job as the CFO to think everyday about how I can have the leadership team together, have the right data and insights to make the best decisions as quickly as we can to move forward, to drive the strategy we are trying to drive.

Accountability, you know sometimes when we reorged, I often heard, gosh, it seems like where did the accountability go? Well, the answer is I think everybody feels deeply accountable to one their function in a world class way. And I feel an accountability to report on that progress both to you and to my peers. It’s important, because it builds credibility and it also builds awareness. And insight, my job to you and inside the company is to provide insight on the opportunity we have, our ability to execute on it, and the actual ability to show you in our numbers the insight into the day-to-day environment we see.

So with that, my guess is you are more interested in this part of the session. So we will move on to the business model transformation. I tried to simplify some of the questions I have been asked by each of you and on the calls and in my old job. Help me understand where you are Microsoft in this model. We know the Microsoft that was on the left. A company that made a royalty on PCs generally made a license on consumer software and sold licenses into IT departments in the enterprise. The model we are already shifting to which Kevin really talked a lot about this presentation was moving to a device business that’s still royalty-based, but also gross margin based, an enterprise service business that’s licensing and subscription and a consumer service space that’s advertising and subscription based.

Where are we? We are on our journey. And I think our goal today is to point out where we are in some very important examples. When you think about the importance of moving from the left to the right, it’s because the opportunity is larger. There are more devices than there are PCs. There is more services and consumer applications than Office. And there are certainly more enterprise services that we can provide than even our $12 billion businesses that we have already created achieve. There are trillions of dollars spent today in IT. The model on the right allows us to access far more. And so that is why when we talk today, it’s all about the transition to a bigger place.

With that, let me start and explain some of our first examples. I want to introduce our new vocabulary here at Microsoft. We are sort of used to using different words, but I would say this is the language we now use. It’s a language about everyday excellence and opportunity around operational excellence, operational excellence everyday, every week, every month, every year, these are the words that make it great. This is the language we use in the field that Kevin uses, it’s the language we use in engineering, it’s the language we use in finance. I think if you expand and say, gosh, looking back over the past year, where are some things we could have done better? There are probably things on this list and there are things we are focused on, but we have to be great at these as we go through these business transitions we are going to talk about.

Let me move to the consumer services section. You may not realize it, but currently in consumer services and applications today, we have a $15 billion business. It’s an incredibly strong base far beyond that of just Office to move to the future. We built Xbox LIVE and the gaming business. We built communications business, a search business. We have clearly grown our productivity business. We have a storage business. But the future and is actually asked in the Q&A today was around combining many of those experiences to create end-to-end solutions.

When you sell end-to-end solutions and you do it in the cloud, you give day-to-day value that people want to subscribe to. They see your latest innovation in the moment. They know that you are an innovator. They understand where you are going as a company. Putting these assets together creates a big opportunity to move our subscription business forward as we complete some of the core scenarios you have heard us talk about today, whether it’s social, whether it’s task completion, whether it’s a better way to express yourself beyond simply PowerPoint.

Actually, as a consumer, I think I am two things, I am a consumer apparently a worker, and I was supposed to use different things. I use one thing. And I want that thing to be the same whether I am having a meeting at home, meeting at work, these are the tools that are going to let us do that. They are the tools that are going to let us be successful both in the enterprise and outside of it. By combining these experiences, you heard Terry talk a little bit about it, it will let us grow both the consumer business and the enterprise business. You know, the example I get asked to talk about the most is Office 365, the transition from Office consumer to a Home Premium business.

Let me jump into that. Most of you guys know this. Office today sell a license. We generally sell it at the time you buy a PC. You kind of buy it every 5, 7 years depending on how often you get to a store to buy a new PC. You may buy a new PC and use your old disk back in the prior world. And we recognized all that revenue technically upfront. With Office Home Premium, I will start with the most important thing, which is why it’s a better product. The way you make actually more money is you make your customer really happy.

The best experience in Office Home Premium comes from the fact that it’s always up-to-date. You get our best stuff the fastest. And like someone asked why don’t we do a better job of integrating our products? When you buy an Office Home Premium subscription, you actually get rights to SkyDrive storage and Skype minutes, and we are already seeing increased usage from SkyDrive today from the deep integration into the product. It just works. You are able to go from device to device, finding your place in a PowerPoint deck that you had to close on a different machine. It follows you. It follows you, the consumer. It knows you across your devices. That actually brings meaningful value. And it also makes us seam because we are the innovation leader in productivity. People are no longer using services, otherwise known as a disk that’s years old. You get our best stuff fast.

So what does that mean economically? Economically, even over a very short period of time, a little over two years, we are better off in this model, but it does mean as we said, and I give you example for Q1, in our guidance that we gave in July, $150 million of revenue that we otherwise would have recognized in the quarter goes to the balance sheet. Now, I am happy it’s on the balance sheet. These are more profitable long-term customers than we have today. And they are going to be more engaged and ultimately happier with Microsoft product and with their experience. To me, this is sort of the easiest way to explain the benefit in this particular segment.

I also want to give you an example in the enterprise. Again, I have to go into a short history lesson, which is that we were a company that basically sold Windows and Office into the enterprise. Then we used to come to these meetings and get asked if we could be a serious enterprise contender. We have built $12 billion businesses in the enterprise. Many of which are multi, multi-billion dollar businesses that you heard both Satya and Kevin talk about. That is such an impressive base and a foundation to drive into the next wave. It gives us an incredible base. We can continue to offer hybrid solutions and we can monetize at a higher rate.

Let me actually give you the first framework of how I will walk you through this enterprise transition. I would say I think about it in sort of three key buckets. What things can you achieve by moving people to a service? Number one, and you will hear me use this framework quite a bit going forward, I have used it on Office 365 for a long time. First, it allows you to increase reach. What do I mean by that? New customers and new seats within existing customers, both opportunities, we have seen a 150% increase in small business customers in the past 12 months, and we already had 15% increase in our kiosk attach, think about that as a new user within an existing entity, already proving the first point.

Next, increase the frequency. Now, this looks slightly different between an EA customer and what we call in our current disclosure a business transactional, someone who purchases once every now and then, but the outcome is the same. In a service model, where we prove and create value everyday, you should expect us to do better than our current 75% license renewal rate every time an EA subscription comes up for renewal every 3 years. We should do better than that, because we add new services. We should do better than that, because it’s deployed. We should do better than that because we show value. If you do that, even from existing customers, you make more money. And by the way, they are happier.

Next, small business, they tend to purchase as we said either infrequently, right or not at all. I already covered not at all, so 5, 7-ish years, maybe longer. In the service model, we should be able to do better than that for the same reasons. And probably more opportunity here on this particular dimension than there is in the enterprise. And next, increase the yield on an existing seat. We have two ways to do that. First, we can add services. You might say you maybe able to do that forever, you keep introducing new products. The difference is in a service model, it’s far easier. Deployment is different. Adding services is different and it’s easier. So the opportunity to do that more frequently and to continually add services with reduced cost because we run your IT for you is improved. We can also sell more premium versions of the workloads once they are deployed. So 75%, as you can see, of our enterprise customers have more than one workload. We can continue to do better than that. And we certainly have opportunity in selling our premium workloads. If you think about all three of these dimensions and you classify our customers into them that’s the best way in your framework to think opportunity, opportunity, opportunity.

With that, let me give you an example. This was really only going to show one dimension mathematically, which is if I take an annuity customer, currently what we call Core CAL. The Core CAL gives you rights to Exchange, SharePoint and Lync and the standard versions of those SKUs. There is many things that are actually quite similar here, unlike in the consumer example. You know, billed annually, that's still true; recognized ratably, still true, we have always recognized our annuity contracts that way, no difference here. They are generally still 3-year commitments often and then a renewal, so not really accounting statement. The difference comes in our ability to up-sell. If we can actually take this customer and simply sell them the premium SKU of their existing workloads and Office 365, our gross margin percentage goes up 50% per seat.

Gross margin, the new language of the service business, revenue also goes up, gross margin, 50% growth. And that doesn’t represent, it only gets better than that if we do any of the following: do better on churn and renewal, add other and new workloads, Azure identity, the new BI Power View that we’ve just added as a module, incredibly powerful given Excel, Excel Services and SharePoint that Kevin touched briefly on and so if you think about that, that’s why grayed – blued the top. We know we get a 50% gross margin improvement and it goes up from there.

The next example I will talk a little bit about is Azure. Azure is in an earlier state of the transition than Office 365. So here we know that we have a 3X improvement in our addressable market. We also know that business is a bit different. You have to address the opportunity in, I would say, 3 buckets for us. There is a consumptive model. Pay as you go, it’s optimized to take advantage of elasticity, of availability in datacenter’s capacity. People who simply want to try, and it also gives a low-end entry point for developers.

The second model is subscription-based. Subscription-based allows you to get a discount for commitment. That commitment helps us with capacity planning and demand planning, and so the discount makes sense. And we’ve actually the licensing tool, where we can attach this with far more ease to our enterprise agreements, and in fact, I think we may not talk about this, but we have 2,500 EAs currently with Azure that’s been attached to them. That is an incredibly helpful model for try, use, buy, and that model, then as we add new services adds more value.

In Azure, it’s clear. There are some commodity workloads, and Satya did speak a little bit about, and we will probably have longer discussions at some point, about some of the high value-add services. If you compete at the commodity layer with an opportunity to sell at the high level, and we know those activities are connected, you can improve the gross margin profile of this business and move further and further up the stack. This is what we know how to do well because we run high end first party workloads on Azure. We know what high end workloads need. And I think that’s our best opportunity to grow this business the fastest.

I will also say this is one of the places that we are investing ahead of the curve. We talked a lot about capital expenditure, and I want to really be able to explain what we’re doing. All the growth that we talked about for Q1 and now for FY ‘14 is investment directly in datacenters and servers. It’s directly in the datacenters and servers globally to increase our footprint, to be able to take advantage of the Azure, Office 365 and consumer services opportunities we just talked about. This is required for us to grow the opportunity as fast as I think we can because of our competitive advantage. I do think it’s important to remember with that $2 trillion opportunity, being the first to China, being the first with this type of global footprint with the Office 365 services we have, the Azure services we have, with the Office consumer profile we have, I think we will have a good return on this investment.

With that, I want to sort of change speeds a little bit from our examples. So what does all that mean? We have a lot of opportunity with this new model. We are investing to capture it, but more importantly we are creating economic value by doing it. And I think this is an example we will have to continue to walk you through as we make more progress in each business, but we will, and I think that’s going to lead into the operating segments.

When you think about introducing operating segments, financial reporting no one changes their reporting segments lightly. I know it’s a lot of work for you. It is a lot of work for us. There is obviously the requirement. You should report the business the way your CEO manages the business. But beyond that, beyond that principle, our goal is to show the transitions in the business model we have just talked about clearly. The goal is to show the progress we are making on devices and services more clearly. And the goal is to show more accountability to the gross margin profiles we are changing.

So with that, let me move on to our 5 new reporting segments. We will have 5, just as we did before, and we will continue to have a corporate bucket, which I guess doesn’t count as a real segment, but would make 6. We have hardware, licensing, other under a broader concept called devices and consumer. Then we have our commercial business with licensing and other, with others being enterprise services plus our enterprise services part two. One is people the other is actually Office 365 and Azure.

What’s important about this? Each of these categories have similar gross margin profiles. A hardware business is a different profile than our licensing business. It’s a different profile than our services businesses here. You will see a disclaimer. There is far more information than I could ever cover in this presentation of what’s in each segment, and so that will be available, we are also filing an 8-K to help explain some of this. But I think more importantly is for us to talk about what you should expect. We’ll report revenue and gross margin for each of these segments. We will then report operating income for the two aggregations. Operating income where it is clearly and fully attributable to one of these areas will be directly put in that reporting segment. Where it’s shared resourcing, our new re-org, it will be allocated by gross margin.

What to expect. I didn’t expect you guys to get all of that down in 2 minutes. However, I want to make sure we are all clear on what to expect from now till the earnings announcement in October. On September 26th, we will host a call. On the call, we will, before that, provide quarterly restatements for two years and walk you through those. We will do a more complete list of the new KPIs we’ll provide to help you understand both the transition as well as some of the new businesses we have entered and the momentum behind them. We will also provide a Q&A session. Ask away. We will have both our controller on the phone as well as IR and you will get as much detail as we’ll provide and take as much time as we need.

Between that and Q1 earnings, you are obviously welcome to ask as many questions of either me or the Investor Relations team as we need to for you to feel ready for October 24th. October 24th, all the financials, my commentary, will be reported in the new reporting construct, as will my outlook. However, we will also report all Q1 results in the old model as well as supplementary information as opposed to primary. That should allow us for a transition period as we continued to evolve your models and our guidance.

We won’t provide any additional impact on Nokia just because it won’t have closed. So I wouldn’t expect any more guidance on that in Q1, so I wanted to just be clear in terms of setting expectations. You will have to listen on the call for the numbers. So why make a change this big? In some ways, it’s hard. But adding accountability to our progress in all those areas, adding accountability to the gross margin of the investments we are making in CapEx, and giving you transparency on how we are doing in our devices consumer efforts, as well as our commercial business is important. It really reflects many of the questions I have been asked in the past 5 months. We can’t see what’s happening. We can’t see when you are moving licensing dollars to services dollars. We can’t see in the Windows business the commercial revenue versus OEMs. This should be able to make many of those health indicators more clear.

So what does that mean for FY ‘14 in my comments? I do expect FY ‘14 to continue to reflect the ongoing transition to the cloud. We said that from the beginning, that’s not new. We have expanded our device portfolio, and by the end of FY ‘14, I hope we are the owner of Nokia. And we will continue to make the investments in the global datacenter footprint that I outlined today. With full confidence that capacity will be utilized by very happy customers. And finally, I will remind you that our FY ‘14 OpEx guidance is here. I sometimes think that we had a lot of change in the past 5 months. I say that as the new person, but I would say I stand here more confident than I did when I took the job that we are making the changes we need to make to drive economic value. We have added insight. We have added accountability. We have added clarity of our purpose. And we have put leaders in charge of businesses that can drive them forward.

At this point, I have the pleasure of turning the stage over to Steve, who I would say has been a great partner for me personally in these 5 months. I think there is no one who cares more about the success of this company than he does. And there is no one who has put more effort into setting us up for the future than he has. I greatly respect his leadership in my time. And more than that, I respect everything he has taught me about being excellent at something.

So with that, let me have you welcome Steve to this year’s FAM. Thanks. Thanks.

Steve Ballmer - Chief Executive Officer

Well, thanks. I am glad to have a chance to be here. I am not exactly on schedule, but close to on schedule. We had that Super Bowl moment there earlier, and I was kind of wondering whether we were the Ravens or the 49ers in this event. I hope we are the winning team, so to speak.

I want to talk to you today about the kind of state of Microsoft and my enthusiasm for where we are and where we are going, and because we have called this thing, at least my whole time at Microsoft, the so-called Financial Analyst Meeting, I thought I would start with some numbers. And the numbers aren’t designed for any one purpose, although I think they will serve three purposes. Number one, we built a heck of a good company. Number two, we are aware that there are challenges in front of us. And number three, we are actually very well positioned for the biggest and most incredible financial upside that the company could dream about. And in some senses, you’ve got to embrace all three of those things. You’ve got to embrace success. You’ve got to embrace the fact that there are headwinds in certain areas. And you’ve really got to just – at least in my case, I am incredibly motivated and excited about the financial upside, let alone the upside for doing great new products.

What I did here was sort of to collect information on seven companies, and these are all on the website. You can all study them later. And I am not going to crawl through every number, but I am going to make a few points. There are seven companies up here. Microsoft is the one that is very carefully boxed, so you can’t lose it if you try. And then I wrote down three companies essentially who were born somehow on the consumer side and kind of what they look like financially.

And I have got three companies that are born and live primarily on the enterprise side. I picked a couple of companies on both sides that actually make a ton of money. This group of people actually expects us to make a ton of money. I am not sure how much credit we get for something that grew quickly and made no money, but for completeness I will show that it’s a path to creation of market value. If you will, all three of the companies on the right are real “enterprise companies” in no way, shape or form would I say they touch the consumer. The three companies on the left were all born with the consumer, and yet particularly when you look at both Amazon and Google, both of those companies now are actually what I might refer to as three tool players. They are trying to be device companies, they are trying to be consumer services companies, and they are trying to be enterprise services companies.

In the case of Google, we certainly meet them with Google apps in the market everyday. They obviously are in consumer services business with search. And with what they are doing with Android and Chrome and their own devices let alone third-party devices, they are trying to compete in all three of those bubbles that Amy talked about. Same thing with Amazon, they compete in all three places. Microsoft successfully actually competes in both the consumer market today. You had a chance to see some of the numbers that Amy showed you on profitability of our devices and consumer services business. And we compete in a way that generates a lot of profit on the enterprise side.

If you take a look at some of the numbers, I am proud that we have made more money than anybody in this list in the last 10 years. If you take a look at the last 5 years, it is a great reminder that there is huge profitability in our industry in the devices business. Not everybody may make it, but it is a huge source of our profitability through Windows. It is a huge source of profitability for Apple. I don’t list Samsung on here, because I am never quite sure how everybody else would view kind of Korean accounting standards. So I just left it out for complete – well, let’s just say it’s too complicated for me. But you take a look and you say okay, how have we done? We have done pretty well in profit, very well in profit, in fact. Even if you look at just the last year with the exception of Apple, we are the most profitable company on the list. If you look at dividends until Apple started a dividend, we are the biggest payout, now they have passed us we have just made our most recent increase.

If you look at cash returned to shareholders, last 10 years we kind of blow everybody away. And if you look at the last several years, IBM particularly through buyback has chosen to return cash. CapEx, you can take a look at this and you say, whether we are a devices company or a services company, CapEx levels are higher in the future than they were for us as a software company. Acquisitions, certainly the biggest thing we did in the last 5-year period, was the acquisition of Skype, but acquisitions have played a role for us and our competitors. And then you can see enterprise value, which to me is kind of a job one indicator. Cash, we are obviously moving to return increased amount of cash back to our shareholders, but we still nonetheless manage it knowing it’s your cash, it’s not our cash, it is your cash, it is my cash too, by the way, as a shareholder. And we try to manage it appropriately, although we are returning it in greater amounts than we have for the last several years. So we have been very successful. We make a ton of money. We are very proud of that.

Windows, Windows has some challenges. For the first time over the last couple of years, Windows has done something other than just grow. And we understand the shift that’s going on in the market. We understand the superior value that a PC brings to other devices in many forms of use. And we understand that there are reasons why people also like and appreciate tablets and phones, and those devices will continue to proliferate.

You can see it here. It’s a sort of stark reminder that if we are going to continue to grow and prosper, we can look both to, if you will, the right and the left of us on this chart and say both devices and enterprise services companies make a lot of money. The one thing that’s actually toughest is understanding how to make money as consumer service company. Google does it. They have this incredible, amazing, dare I say monopoly that we are the only person left on the planet trying to compete with. But other than that, most of the consumer services companies just don’t make enough profit to really register at this scale, maybe Facebook will. People mentioned Dropbox, I noticed in the Q&A and Evernote.

But one of the things that we have really kind of taken note of from a profitability perspective we will be led by our work in the enterprise services and devices. We think that the greatest profit growth, it doesn’t mean the greatest innovation; it doesn’t mean we won’t do “consumer services,” because they are important. They are important to the customer. They are a path to enterprise services. They are a path to device success. But in some senses we will lead as we go to market and we will certainly lead in terms of how we hope to generate profit through devices and through enterprise services.

When I say devices, you should always hear virtual devices. I would refer to Windows PCs as a virtual device, since we don’t actually make them. And you ought to hear physical devices, like the Xbox, like the Surface, and with the Nokia acquisition like the Lumia and other phones. So in a sense that’s how I think about the business economically. I think we can grow. I will talk about what I think it takes to have us grow successfully and why I think we are well positioned. But, that’s kind of the mental framework that I’d encourage you to at least engage with me in to make your own evaluation.

When we talked about our reorganization, in a sense the word re-org almost understated what we were doing. We were really clearly laying out a strategy that we want to pursue. We spent the last 6 months as a leadership team more engaged time wise than we have ever been, not sort of beating out what a reorganization looks like, but really fundamentally honing the strategy, the strategy first and foremost of focusing in on high value activities. There are all actually high-value activities and low-value activities. Although sometimes you will find that somebody’s low value activity, somebody else’s high-value activity, I certainly know teenagers who think using Facebook is a high value activity and yet that’s not kind of the way we think about it.

So we said, look the place you create real money is when you do something that is really important to your customer. If you are not doing something that’s really important to your customer, there is probably not a chance to make a lot of money. So we said what are some of these scenarios research and analysis, meetings, social, communications, well I talked about development, IT and data management, task completion. Task completion and you say, what’s a task? And I say task is anything that people feel like they really have to get done. Now you can say that could be as simple as checking the weather. That might not be a high value task, but then you can think about things like, hey, I really have to figure out where we are going to go on this vacation and how much money I am going to spend. We really need to figure out who we are going to go see for this disease that some family member has been afflicted with.

Expression, we talk about serious fun around here. I know a lot of folks in this room have a lot of opinions about the Xbox, but it is a high value activity to a certain community of people who spend hours and hours and hours. I was talking to a senior government official today and they would like us to provide some public service advertising on the Xbox. And this senior U.S. government official said to me, I don’t really know much about the Xbox, but my chief of staff is 28 and he said don’t worry, I spent at least 25 hours a week when I was in college on the Xbox. It’s a place we need public service advertising, but in a sense I’d call that serious fun, a place where people will really spend dedicated and purposeful time.

IT and information assurance, customer interaction, there is one probably underlying thing that I should highlight is a high value activity, and that’s getting the fundamental user interface for the device and the system right. Even routine tasks are facilitated by getting the basic sort of construct of the device right. And I might argue that almost all the money, a huge percentage of the money in our industry has been made on those transitions. The PC was a new user interface and a new form factor. And Intel and Microsoft made a lot of money. If you will, touch and low power was a huge change in the way the user interface paradigm worked. And Apple and Samsung and Qualcomm made a huge amount of money. We are not done seeing fundamental shifts in the user interface and kind of hardware approach to devices. And I believe that too represents a form of high value activity.

How do you monetize high value activities? Amy talked about the three bubbles: devices, consumer services, and enterprise services. The two that are most easily monetized, in fact, are devices and enterprise services. Consumer services, as we say, are tough. Other than phone companies, there really aren’t many technology, large subscription consumer services, and outside of Google and maybe Facebook it is hard to find a business that is significant that is ad funded. So we look at these three bubbles, if you will, as places to land these high value services, and ways to monetize these high value services. We are also making, behind the scenes for all of these things, core investments in fundamental technology. The operating system, Terry talked a little bit about it. It’s a core technology investment. There just aren’t that many people left making fundamental operating system investments. UI innovation, as I pointed out, UI innovation is critical, because inventing the next hardware-software paradigm does create an opportunity to make a ton of money.

Machine learning, at scale, it’s hard to argue that, other than Google and Microsoft, anybody is making an at scale investment in helping develop technology that studies the world and studies the user and tries to help computers learn about people and serve them better. It is a scale game. It’s a moat. There are really only two people who are making the investment. The investment in the cloud infrastructure, the investment in the technology, and I think it will be one of the defining characteristics of the next generation of device and user interface.

And last, but not least, is cloud infrastructure. Cloud infrastructure to me, and this has become clear really over the last 4 years or 5 years, it’s a pretty fundamental investment and it’s not as simple as saying, let’s go build a bunch of datacenters. It’s really learning how you architect these things to be low cost and at scale. We used to design datacenters by thinking about servers. Now literally we designed the buildings as the unit of compute work in order to take cost and complexity out of the equation.

Google, there is sort of this almost Dr. Strangelove kind of arms race that goes on, at least amongst people who operate datacenters. How many megawatts are they buying this year, that’s sort of the way in which datacenters are rated. How many megawatts will Google put in? How many megawatts will we put in? And in a sense there is only really a couple or 3 companies that are really pursuing that at scale. Amazon is, we are, and of course Google is. But without these core technology strengths in the cloud, in machine learning, in hardware and software user interface design and the operating systems, I think we are a very different company. And the thing, as I’ll talk about later, that makes me most excited is I think we are making the core investments, we are building out the applications that are most important, and we have got a clear view of how we want to take those to market and monetize those.

Now, there is a lot there, and people could say, okay, well, that’s a great framework, Steve, but it’s here and now a baby and you guys have to deliver. So let me give you kind of 4 clear priorities. And at the end of the day when we want to put up the kind of slide in front of our 100,000 employees at a sales meeting or a company meeting, you’ve got to simplify. And over the near term there are 4 things we’ve got to get right. Number one, Office 365 and Azure have got to be a touchdown. They have got to have the innovation, they have got to have the differentiation, they have got to have the value, they have got to have the sales and marketing energy and support to really, really, really kick ass. They just have to.

And the surge in Office 365 is actually quite amazing. We started this enterprise cloud investment about 8 years or 9 years ago. We took over running the knowledge worker infrastructure for Energizer, the battery people and we used that as a test lab and we built and grew from that position. And it’s quite clear to me that by this time next year we will overwhelmingly have the most popular paid service in the enterprise, bar none. And we will have an engine really with Office 365 to which we can attach new services and new options, both for the IT department as well as for end users, marketing departments, etcetera, inside our customers.

The second area of focus is Windows PCs. We must do the job to ensure that the PC stays the device of choice for people when they are trying to be productive in life. It doesn’t mean that people aren’t going to buy some tablets to be productive, but if you look at the bulk of the tablet market today, it’s moving actually to smaller tablets. Our OEMs in Asia oftentimes refer to those as entertainment tablets versus productivity tablets. We know that we have got to do a great job. Windows 8.1, I think is a very distinct improvement, and we are going to have to put time and energy, not only into Windows PCs, but into brand Windows overall. Our device brand more than anything is brand Windows, Windows Phones, Windows PCs, Windows tablets, and we have to make absolutely clear to people what the value proposition is and by the way how they can also get some of those same high-value services on non-Windows devices, on iPads, on iPhones, on Android devices, etcetera.

Mobile devices, we have almost no share. I don’t know whether to say that with enthusiasm or kind of uncomfortable tension, but I am an optimistic guy. Anything we have low market share sounds like upside opportunity to me. We are paying to do it all day everyday. It’s in all that OpEx that Amy talked to you about, so now it’s just boom. It’s getting after it and really making sure that we deliver the kind of revenue and gross margin upside that’s certainly there. The Nokia deal has a lot of things. One of the things that it certainly is, is the way to make sure that we can actually capture the gross margin upside, because we are making most of the investment today that we need to make even owning Nokia. So we are very excited to have a chance to capture the gross margin upside by actually being the device provider, particularly given that Nokia already sells over 80% of the Windows Phones that gets sold around the world.

And last but not least, we need to continue to innovate in high-value activities. When we get together as a leadership team, we are sitting there and talking about what are we going to do this year to improve the meeting experience, how quick is it for people to connect people remotely, how good does digital whiteboarding work, how good does the pen work as a tool for annotation and drawing and sharing in the meeting? I guarantee you if we can get just a couple or three of these high-value activities to explode and you had a chance to hear about some of those from the panel, that is absolutely at the end of the day the thing that’s going to allow us to sell more enterprise services and the thing that’s going to help suck through our consumer services and devices.

When I take a look myself, now, this is me as an investor and I am preparing to be an investor here in the not distant future. I say, what does Microsoft really look like? Devices, we talked about PCs in Windows 8, the tablet in Surface, phones in Nokia, Xbox in the living room, the work that we are doing with this acquisition we made about a year or so ago called PPI, to do wall-sized computers for offices, I think is very powerful in terms of what it can mean strategically and economically. I look at all that and with perfect awareness that there are some headwinds and risks in the PC business, I look at that and say we have amazing, amazing short-term opportunities in devices.

In consumer services, it really gets down to two major monetization opportunities, Bing, and Bing has been performing very well. Year-over-year, our revenue per search is up, I don’t know, 30% to 40%. Our search share continues to improve. We are getting smarter. We used to invest a lot of money in customer acquisition. Some of those deals were not as good as I wish they would have been. We are actually now saying what’s our number one customer acquisition vehicle for Bing. It’s actually Windows devices. We are making sure that we really get Bing well-designed into Windows and Windows Phones and Xboxes. We are making sure that those are first grade experiences. And we are making sure that they monetize better and better and better. So I am very pleased with the opportunity to improve our search advertising business.

Amy talked a little bit about Office and Kevin talked a little bit about Skype for consumers, but essentially the way to think about it is through Office 365 Home Edition, do we have a way to not only convert the business that we have been doing with high-end consumers for Office for productivity on PCs, but do we really have a way for people who really value their time and energy to pay us more money? I will tell you a couple of stories.

If you look at the total base of consumer PCs that gets sold, about 60% of them get sold to consumers. Of that population, about 15% to 20% actually pay for Microsoft Office, some don’t use it and some don’t pay for it and I will be kind of silent as to what percentage is what, but let’s say, piracy is certainly quite high. But when people are making that investment, whether it’s a student, whether it’s somebody who works out of their home, whether it’s, I don’t know, somebody like my wife who is very busy in not-for-profits, the chance to get that customer to stay current to pay us more money, we are probably not going to get the least affluent person in the world to come with us on that journey. They will use the free stuff, but to the degree that people value their time and energy for productivity and communications, it’s a heck of an upside.

And then last, but certainly not least is the cloud and hybrid services. This is really important, because while the cloud is valuable in all the ways that Amy described, we still get plenty of customers for certain applications and workloads who are not prepared to fully embrace the cloud. So our ability to deliver on-premise private cloud and public cloud is very important. The ability for us to offer value-added Azure services to people who primarily buy Windows Servers is very important. The possibility to help a customer build a transactional application on SQL Server and yet do the business intelligence in the cloud is very important. And you can go on and on and on not just in people who want one or the other, but in the complement in those scenarios. And our ability to sell those and get them sold in now, because frankly competition is not very active in the game. Amazon is all about the public cloud and has really no on-premise solution. Google is relatively quiet outside of productivity. Even though they have solutions they are relatively quiet. And frankly we have been handing it to them pretty resoundingly in bigger accounts, Office 365. Kevin talked about how well we have been doing. Even I am impressed, and I am not easily impressed. Losing one account is losing too many and yet we don’t lose too many.

And then if you take a look at VMware and Oracle, they are playing primarily with on-premise solutions and not with public cloud solutions. So somehow magically there is this enormous opportunity for us to be the unique player who can bridge this world of the public and private cloud. And you know if you take a look, one of my favorite acquisitions we did was this company called StorSimple. It provides cloud-based storage solutions that we can provide, if you will, in conjunction with Windows Servers or Linux servers frankly that are on-premise. And that thing has really exploded for us and it helps our customers really understand why to double down on us as a hybrid cloud vendor. I heard the questions that came up and I addressed them briefly about non-Microsoft platforms. Those all do represent upside to us. So we don’t have our heads in the sand. We are working away on all the things you think we should be working away on.

The most important things first to have is communications and notes. They have to be on every platform and we have done that. Doing authoring correctly on other guys’ platforms without a keyboard and a mouse, it’s tough enough to do it on a Surface where we do have a keyboard and a mouse in a tablet infrastructure. We are investing in building those things in an absolutely first grade way. It’s not clear to me what kind of opportunity financially our competitors are going to allow us to have providing e-mail on their platforms. But even that is interesting to me. It’s interesting to me, although both Google and Apple do a pretty good job of kind of clamping down on the default e-mail experience in their two platforms. So we are building the things that you would have us build. We have surprisingly less religion than you would think we probably have. But we do know the following things are true. We can lead with our enterprise services, but our customers will require us to support other platforms and we are doing so or we can lead with our devices, particularly in the consumer market, and even so if we want people to adopt our services there is a requirement that we support some other platforms.

We are always Windows lovers. We love Windows. Windows is first, Windows can be best, because we have the capability of doing so, but we are also eyes wide open and being I think pretty smart in taking a look in developing for other platforms. The next question you can get to is how well will we execute them? The reorganization that we did was more than just let’s move some people around. It really was a fundamental shift from running a set of separate business units, where we tried to make connection points to running a company that is essentially one integrated entity. Now for those who wish that some of the units would go away that probably doesn’t sound very good, but for those of you who really want us to get more agile, more focused and in a sense simplify, it really forces that.

The old world we could dream about doing thousands of things in a very small way. In the new world, because we have to get marketing, sales, everything aligned across the company. What I would probably tell you is we can do fewer things than we could have dreamed about in the old world, but we should be able to do them more successfully by training everybody in the organization on those things. I don’t want to create some expectation that there is some major thing that’s going away, a) that’s not true and b) that will be for somebody else to work on here in the not too distant future. But I do tell you that I think one of the grand opportunities now is to take the big things that we talk with you about all the time, the things that Amy is going to highlight in these KPIs that we talked about and really stay very focused, simple and agile against those targets.

I also want to tell you we have incredible talent. This is something I actually think I understand probably better than almost anybody on the planet. We work with almost everybody in the technology industry. The people we don’t work with because we compete with them guess what we are out recruiting the people everyday. So we know the mid level talent at all of our competitors. We are competing for university talent with all of our competitors. And I will take our team just hands down versus anybody in the business. It doesn’t mean that there aren’t some other good teams out there, but we have a phenomenal team starting with the leadership team. You know, about three years ago, I think it was the first time I put in my personnel review with the board that I actually was thinking about the day I might not work at Microsoft. And I agreed with the board that I would spend some time getting to know all of the top people at our competitors, if I could, so that we would have some knowledge base. Whenever I was to decide to retire, we’d kind of know the people from outside Microsoft who might be candidates.

Now, right now we are in a board succession process, but I have spent three years getting to know a bunch of people. I know senior leaders at all of our competitors at this stage. I have spent time talking to them, interviewing them, getting to know them, talking about Microsoft. And there is a lot of good talent out there, but when I come home I would tell you there is just an incredible group of talent at Microsoft that is competitive with everybody else in the industry, full stop period. The third aspect I would say of execution really will be the new CEO and that does matter. At least I believe that matters so deeply and heavily as the current CEO. And I know our board is in the process of going through a thorough process to evaluate candidates from within and outside of Microsoft to be open-minded.

We made this decision to announce before we had a replacement, so we could run the absolute best succession process on the planet. I have got to say it’s kind of a little weird for me to come to work and have that kind of known and yet when we talked it all through, we said this is absolutely the best way to ensure that the company gets the leader that it deserves for this incredibly talented team, whether it’s one of our people who works here or somebody from outside, we wanted to make sure to be able to do that incredibly thoughtfully. Great opportunities, a clear business model, a team and an organization structure that I think will still need to be improved but can get us there. But the other thing I want you to understand just before I move to wrap up is how uniquely poised I think Microsoft is to drive the next big thing.

Now, what is the next big thing? Well, it’s the next big thing. And you would say, well, tell us Steve what is the next big thing? And of course, there aren’t that many next big things. I mean, I know people say our industry changes all the time and (indiscernible) and something is always flipping. But if you look at it in a Microsoft context, Bill Gates and Paul Allen recognized that software and microprocessors went well together. We bet and succeeded on graphical user interface. We got serious about Intel architecture in the datacenter in about ‘88. And today, people say we are an enterprise company after about 15 years of saying we would never get it right in the enterprise. And almost all the value in our company was created essentially on those three insights. Even if you look at our competitors, most of the wealth and value were created on one or two key insights, getting search right first, really understanding the power of small form factors and low power processors, really understanding the value of an enterprise relationship, getting databases figured out before anybody was there. Each company in our industry probably has one or two or three really big things.

But I think that the next big thing that will create value in this industry will probably require companies that have certain capabilities. They will have to understand natural user interface and hardware. Hardware and software will need to kind of evolve together, somebody whether it’s wearables or what’s going on with screen or input technology without the right hardware and software skills, without the right machine learning and cloud infrastructure, without the right focus on applications and platforms, without the right appreciation of consumer and enterprise, I think it’s hard to do. And when you write down the list of companies that have the capabilities that I listed, you would certainly put Microsoft, you probably put Google. We all have certain different strengths. And then after that you might say, hey, Apple is there in many dimensions, but they don’t have the investment in cloud infrastructure, they don’t have the investment in machine learning, and then it just starts to slide from there.

So with Microsoft, not only do you get what I would say is incredible short-term upside albeit with some managed and kind of focused areas of risk, but you also get a company that has unique capabilities to shoot the moon if you will for the thing that would really create something that might generate $30 billion, $50 billion, $100 billion of new economic value, which at the end of the day when you invest in a company with enterprise value of $200 billion plus, those are the kind of opportunities that have to look interesting and attractive to you. So we talked about creating a family of devices and services for individuals and businesses that empower people around the globe, at home, at work and on the go for the activities they value most. How we get there, how we create that economic value in the short run is clear. In the long run we have the tools. I tell our people that we are like folks who like athletes who have been in the weight room. We have been training. We are skilled. We are ready. And we have people thinking and coming to work every day saying what is that thing. And it may not happen next year, it may be 2 years, 4 years, 6 years from now. In the meantime, there is great economic upside here. And in the long run we are almost uniquely or just a couple of us poised to seize the opportunity.

I am along Microsoft. Now I am going to switch. I won’t talk as CEO anymore. I am going to talk now really as an investor, because after I retire I am just a guy who owns 4% of Microsoft. And that’s about 65%, 70% of what I have ever owned. I think I have sold 5 times in my life and I bought once, and I hold on and I treasure my Microsoft stock. And I have treasured it. I know some of you wonder if I treasure it like one of these crazy founders who can’t let go, blah, blah-blah, blah-blah. No, I actually treasure it as an investor, too. I am a believer in Microsoft. I am a believer in the company. I am a believer in what we can do. I don’t normally give you the sales pitch, right. It’s been my tradition to try to highlight risk factors and (indiscernible). Not today. Today, I am speaking as an – all of you, get up. You all own Microsoft stock. Cheer for it, for God’s sake. We all want it to go the same direction, up.

Alright, and certainly I am very long. I am – no, that’s not true – 70% of what I own is in Microsoft. 70% of all the Microsoft I have ever had, I own. And I believe in everything we are telling you here. And we will bring in a new CEO, and that new CEO will have opinions and ideas and thoughts. And my greatest desire will be to see the company be so much more successful 4 years or 5 years from now than it is today. And that will be grounded in three things. Number one, we’ve picked a great new CEO. Number two, we made fundamental bets before that new CEO came out. The strategies that we put in place, the approach that I have put in place that the Board has endorsed those things are important. The new CEO is important. And the leadership team and the talent pool that is here is very important.

We have financial strength. That is an asset. The ability to invest, to get into new areas, to think about the next big thing, none of you should take that casually as an investor. I am not making any specific comment about buying back some dividends and (indiscernible), but the fact that we have the financial strength and the wherewithal to really consider the things that will create fundamental new large economic value, that’s a reason why you should want to own the stock, and you should never want to see that go away. We should always manage our downside risks and we should always make sure we have huge upside opportunity.

And for all of those reasons I am very long on Microsoft. I believe in the company as an investment. I believe in what the company can do. I believe in the people and talent that are here. And at least this one shareholder will absolutely be cheering every day, from the day I am not working here on. I am MSFT, if you will, all over. It’s in my blood, it’s in my heart, and I will have been glad to have served. Thank you all very much, and we’ll go to a panel discussion.

Chris Suh - General Manager, Investor Relations

We’ll go ahead and move to our Q&A session much like earlier in the day. Our members of IR team are going to be out here with paddles. If you have a question please raise your hand and one of the team will come over and with the mic and then we’ll get started so with that it looks like we are setup so let’s go ahead and get started. Okay let’s start here in the middle paddle two please.

Question-and-Answer Session

Unidentified Analyst

Just a real quick technical question for Amy.

Amy Hood

Yeah.

Unidentified Analyst

The $6.5 billion of CapEx that you highlighted for fiscal ‘14, obviously a big step up from previous years, is that a one-time step up and then back down, or is that a sustainable level for the next several years?

Amy Hood

Well, what I would say is that if you are in the devices and services business and you are successful, I would hope that we continue to need to invest capital to build out the infrastructure and the server capacity over time. So that’s how I would think about it.

Steve Ballmer

Yes, I mean I don’t know what really happens in all the telecom companies, but at least the myth of the telecom companies from 20 years ago, we should make the investment, huge CapEx, and then it all goes away. Success as Amy said breeds new CapEx here. There is no sort of point of saturation if our customers continue to buy more stuff from us. We would consider that a first rate problem.

Chris Suh

Okay, let’s go to the back paddle three, please.

Keith Weiss - Morgan Stanley

This is Keith Weiss from Morgan Stanley. Thank you guys for hosting the Analyst Day and very useful information. Steve, you walked through four clear priorities that you guys are going to be focusing on. Can you give us some benchmarks to how we should look at success against those clear priorities? What would be success in Office 365, Azure, Windows PC, mobile devices, and those high-value activities?

Steve Ballmer

I’m going to let Amy actually answer. Kevin and I know what the answer is, because we have got that born baby. We know and we’ve kind of pumped up the troops on it, but I can’t remember what we said externally. So I am going to let Amy maybe handle the question. Was that a setup?

Amy Hood

That is something. That’s what I’ll use as a word for it. I would say it this way. Kevin has set very clear targets on those four goals for the field this year to execute on.

Kevin Turner

And next year.

Amy Hood

And next year for ‘14 and ‘15, I would say if you went out into the field and asked the 40,000 people who work for Kevin what those four things are, they would all know them. And they would all be able to say what their role is in making that successful. They are quantitative, they are comped on them, and that’s the best answer I have to say that we are clear about what they are, and that we are putting our money and comp where Steve’s mouth was.

Steve Ballmer

Billions and billions would be the answer to the first, I would say. We have clear targets of what we want to do on 365 and Azure and in a sense cloud revenue cries out like a beckon in the night on the scorecard for our sellers. Hundreds of millions of mobile devices would cry out, and we know we’ve got our work cut out to get there. But that’s the way our field would be thinking, and we’ve had – our field and our headquarters staff. PCs, we know we want to arrest and then grow in new form factors like two-in-ones and tablets, which means we love to stay north of the 300 million line, but we’re going to have to work hard to get there.

And the way actually we talk about high value activities or we have with our field is selling new workloads. I would say when Kevin started this 7 year or 8 years ago, there were always products on people’s scorecards, and they would say, this product is too small. Why do you put it on our scorecard? And Kevin said, because it’s our future. And so it was the emphasis, when was that probably 5 years ago, 6 years ago, you first put Lync on the scorecard, or we first put on Azure in the scorecard a few years back. Building kind of field experience with those high value workloads with the enterprise, and marketing those high value workloads in our advertising, etcetera, we need to do those well before necessarily they are generating a lot of revenue and profit.

Kevin Turner

Absolutely.

Chris Suh

I see paddle number two in the back.

Kirk Materne - Evercore

Thanks very much. Kirk Materne with Evercore, Amy just along the new disclosures, are we going to also get unearned revenue for some of those buckets so that we can monitor sort of the bookings process as it were for certain of the businesses that are transitioning from license to more of a subscription model?

Amy Hood

Yes, you should expect to get – that will be. You happened to ask a specific one on unearned. That will be on the list of KPIs that we walk everybody through next week, but that’s a good one and you should expect to see it.

Kirk Materne - Evercore

(indiscernible) one for Steve. There is the perception that you need different types of skill sets to operate both in enterprise and the consumer business. I guess as you see this leadership transition coming in, I guess do you feel that internally you have the skill sets to manage both a very large enterprise company as well as a very large consumer company, and does – I guess how does that impact I guess your view or the board’s view of who makes sense to take over for you? Thanks.

Steve Ballmer

Yes. I mean this is one people like to jawbone about and I don’t quite get it. We have been selling to consumers and enterprises basically since about 1985. And it used to be people thought we were better at the consumer side and worse at the enterprise side. Now, people think we are better at the enterprise side and worse on the consumer side. I’d love everybody to say you are good at both sides, but I don’t see the fundamental – I really honestly don’t feel it even in the culture of the place. People were asking questions of the panelists. Well, Terry moved from Exchange as much an enterprise product as we had to Windows Phone, which is much a consumer product as we have and yet skills and talents transfer very well. Somebody said well, Qi is just a consumer guy. Qi has run datacenters at scale that no one else on the planet has ever seen. No CIO has ever seen. His deep expertise in the backend, I would say, that’s probably most of his dialogue he and Kevin grew up having in the company was kind of about datacenter operations and that kind of thing.

There is so much shared technology. This is the thing that people miss. Machine learning technology, operating system, cloud infrastructure, all of the things I highlighted, they are so shared. Then the question is can you bring those alive for both the consumer and the enterprise? And we think we have and we think we can. I would note that if you take a look at it, Google thinks they can. I would tell you Amazon thinks they can. So there are certainly a number of companies out there that want to absolutely recognize this consumerization of IT world and play on both sides. We grew up that way. I don’t feel like it’s a sort of big deal, if you will, I just don’t. Even Satya sort of grew up on the consumer side of the business and then moved to the enterprise, because he has been working on server and tools for a few years he gets pegged, but he worked on Bing before that and Dynamics before that.

In terms of what any of that means to the succession process, our board is open that they are running a succession process and isn’t going to say anything about kind of factors in thinking. When there is something to say you will hear it, you will hear it from our full board, not from me. I do think that whoever you put in this seat, my seat, will have some things they are stronger on and some things they are less strong on. That’s just kind of inevitable. And the key will be for the board to evaluate who it thinks can be most effective. And I am sure when there is something to report you will hear it.

Chris Suh

Okay. Let’s go to the front here in paddle one please.

Brent Thill - UBS

Hi. It’s Brent Thill with UBS. Amy, on your new reporting structure, do you envision giving more simplified targets to the street? I think we have all been a little frustrated with so many different metrics. Is there going to be a clear mile marker that we can look at in this new structure as you look out and forecast this transition?

Amy Hood

Yes, I am hopeful that I can provide more insight with some clarity on the outlook. I recognize that sometimes our methods of providing guidance or outlook in the past, has been a teeny bit hard to work through. So I recognize the feedback. And I think we will work hard on that. And I appreciate your input. I will give it a good shot in Q1 and then you guys can give me feedback if it got better.

Chris Suh

That’s great. Okay, how about we go with number three over there in the back.

Emily Chan - Sanford Bernstein

Hi. This is Emily Chan from Sanford Bernstein up here. Mark unfortunately is unable to come here today. The question is on the cloud, you talk a lot about the revenue upside and the transition. So how should investors monitor the growth of the cloud business and the transition going forward, any data and any metric that you will provide on an ongoing basis? Thanks.

Kevin Turner

I think it starts with her reporting. I think that if you looked at the other buckets most of those are cloud services both consumer and commercial. So I think the clarity and granularity you are going to have from a precision standpoint around those services is going to be incredibly richer than you have had before. So I think it starts there.

Amy Hood

Yes, I think the title of other is not incredibly helpful to realize what’s in that bucket is more important. That’s really more of an issue from a reporting standpoint. But those really are, our enterprise services will be in the other bucket and a lot of our consumer services are in the other devices and consumer bucket. And I think you will really be able to see the progress we are making on both units, revenue and gross margin in terms of COGS efficiencies.

Chris Suh

Okay, how about going back to number four please.

Jason Maynard - Wells Fargo

Hey, Steve, it’s Jason Maynard, Wells Fargo back here. So I am totally with you, consumer, enterprise, we are all people we use technology both cases, no argument there. But the thing that I am struggling with is it’s harder to make money selling hardware. It’s harder to make money selling software and licensing in a mobile world, and there is this shift obviously to generating, if you will, revenue around cloud services and data for consumers. And the thing that I see is when you vertically integrate your cloud services to your devices right it’s a similar model that you employed in the PC era where you are successful in bundling Office and Windows, right, and it made an amazing use case.

But guys like me and I think a lot of people we have got multiple devices, and however, you cut it I don’t see how Windows devices defined as PCs, smartphones, tablets are going to have enough share for me to reap the benefit as a user of all your great cloud services. I mean I am going to have some iOS, I am going to have some Android, and it’s just too much of a heterogeneous device world for the devices and services strategy to have the same impact generating the revenue. So I am one of the guys who keep arguing you have got to let your apps free and just run cross-platform and if you log me in, not lock me in, maybe I will buy a Lumia device at one point.

Steve Ballmer

Yes. You said something that was exactly the opposite of what I said. So I will say it again, well I mean this respectfully actually, you said you are going to bundle your cloud services with your devices. Let me say what I said, yes, our devices should come with our cloud services. The reverse, I fairly deliberately said is not the case. You will be able to use our services without our devices, but our devices will absolutely honor and respect our services. Now I know we can do a better job on our own devices, because we can also worry about real integration, which is harder to do with the kind of closed nature of the Android, the Google Play Store and the Apple Store. But just put that aside, the truth of the matter is our devices carry our services, and our services will be available on a number of people’s devices.

I am going to say it a third time, I tried to say it in my speech I have said it here. And I think the order is important. A device is – particularly to the consumer – particularly to the consumer, consumers just don’t spend the lot of money after the device and the subscription with the operator. Consumers never did. If you look at our Office business today, our Office business is 15% maybe from the consumer 20%. So maybe 20% of our Office business kind of looking back into a licensing world, maybe 15% to 20% came from the consumer, despite the fact that the consumer buys 67% of the systems. So it’s always been smaller. What we are telling you is we are going to integrate our services with our devices. We will also make our services available on other people’s devices, both to the consumer and to the enterprise. SkyDrive, OneNote, now how do we get our services to be popular on non-Windows devices.

With the enterprise, we kind of know how to do that. You walk into the enterprise, you say sign up for Office 365, you say we are going to embrace your iPads and your iPhones, and (indiscernible), we know how to do that. We know how to get paid. Life feels pretty straightforward. We will manage those things for you. Satya and Kevin both talked about managing those devices. With the consumer, it’s a lot trickier to have a high popularity service with the consumer. Our highest kind of highest visibility consumer service right now is probably Skype. And one of the key reasons, in fact, that we bought Skype was to have a high volume visible consumer service, we probably need – and its cross platform as could be and we probably should use it to capture more functionality. And I will remind you Apple kind of has rules in their stores. You can’t have suites. They know they have to avoid people getting too much traction with their services on their devices, but we are working away on it and it’s very, very important to us. So let me say am I in a different spot than you? If so the answer is marginally a different spot. Devices come with services. Services have to find their way on to non-Microsoft devices and we certainly have to support that without religious bias if you will.

Chris Suh

Okay, thanks so much. Okay, we are going to come up here to the front and go to paddle two please.

Ken Copley - Capital Executive

Hi. This is Ken Copley with Capital Executive. I realized this might be an off-the-wall question, but at a time when Microsoft was even more dominant in the market than it is today, Google strategically made a decision to attack you guys by giving away the operating system calling it open source, and anyway you cut it it’s been successful. They have garnered about what 79% of the market. And right now they are generating about 83% of their businesses in search related advertising or search related services. It’s a highly concentrated revenue stream. And I think when you get a highly concentrated revenue stream that creates a weakness or a vulnerability so to speak. And I am just wondering if you can talk about any kind of strategies that might be in play where you might take advantage of or attack that vulnerability within Google? Thank you.

Steve Ballmer

Well, first of all, we are the only guys in the world trying, and that starts with a great product. We have invested in Bing particularly in the United States some of the new investment in Bing is to make it as good outside the United States as it is in the United States, and that requires more investment because you have to index more of the web. You have to know about more about local events and information, etcetera. So number one, you got to get the product right. Number two, you sort of have to be at critical mass. This is a scale game, because the market for advertising is auction-based economics. So if we have exactly the same quality of algorithms, but a lot less scale in search advertising, we will get less revenue per search than Google does which means they have more money to pay for distribution on Samsung devices or Apple. Rumor has it that they probably pay each of those guys $1 billion to $2 billion to $3 billion a year for distributing their search product. So we have to generate volume in order to step up.

I do believe that Google’s practices are worthy of discussion with competition authority, and we have certainly discussed them with competition authorities. I don’t think their practices are getting less meritorious of discussion. We have highlighted some of their bad practices in our advertising, in our discussions with regulators, the bundling that they are doing with YouTube and Google Maps and some other things. Anyway, suffice it to say that I think they need pressure from competition authority. I think they need pressure in the marketplace. I think with product, with investment, with scale. How do we get scale? The easiest place for us to get scale is on our own devices or on somebody with whom we are closely aligned. We are very pleased to be providing Bing results as part of the Siri offer now with Apple. And you might say well, that’s unusual, but we have made an investment that Apple hasn’t. We found a way to partner with them and we are excited about that in this dimension. So there is a range of things that we are doing. And I do believe that’s an important pressure point. That advertising marketplace right now, Google has pretty well defensed. But I think we have got a pretty good attack strategy. It will take a little bit more time and a little bit more patience. I think it will have great economic return for our shareholders and at the same time changes a lot of the competitive dynamics overall between our companies.

Kevin Turner

The one thing I would amplify there on the compete strategy was the search charms that we have got in 8.1 are certainly an accelerator to Bing as well. So Qi touched on that when he was up here that is we see a game changer both from a usability perspective and a search perspective in that particular piece of technology.

Steve Ballmer

Yes, just – let me just build on what Kevin said, with Windows Phone, I know we have small market share in phones. I am not confused, but we have a high share of searches on Windows Phones. And it is a reminder, just take a look at the share Apple has of maps on their own phones and I know they had all the celebrated hullabaloo but if I remember the numbers correctly, about 65% of the map usage today on iPhones is Apple Maps. So in a sense, probably one of the best ways to get some share in search is to get some share in devices. Google happens to say let’s not have any profit be in the device. Let’s move it all into search. We and Apple kind of have a different view of the world. Amazon, I don’t know where they want to put market profit. They don’t seem to put the profit anywhere and that’s not a shot. It’s just I can’t tell you what profit stream is important to them the way we can about us or Apple or Google. So we see what Google is trying to do between combined economics between consumer services and devices. And part of the reason why the segment we are reporting is devices and consumer services is because we don’t want just sitting there saying well, jeez, Microsoft decided to monetize through search or advertising as opposed to through device gross margin or royalty and think that there is something wrong. We constructed it as a segment precisely, because we do see the same competitive dynamics, and we see the same technology opportunities that Kevin referenced.

Chris Suh

Okay, let’s go with number three please.

Ross Macmillan - Jefferies

Thanks. It’s Ross Macmillan from Jeffries. You made a commitment with Azure to match Amazon for compute, storage and bandwidth prices, and Amazon has a strategy of running their business at retail margins, very low single digit margins. So as Azure grows how should we think about that margin structure? Is there a reason why your margins might be different from a low single-digit retail margin? And then second, do you envisage Azure workloads as being complementary to all the server and tools on premise business or do you think ultimately it will be somewhat cannibalistic and it will take over some of those on-premise workloads? Thanks.

Kevin Turner

On your first question, I think look the infrastructure as a service economics are some of the lowest margin in the cloud. And clearly, Amazon has been tough. And we have been in there matching and competing with them. But if you remember back when we started Azure, we didn’t start with infrastructure as a service. We started with platform as a service. In the platform as a service, which we I believe have leading technology, leading-edge technology versus any competitor including Amazon in that space, that’s where we see the ability to really take advantage of what we call modern IT when people really rewrite their applications for the cloud to be able to leverage a pay as you go service to be able to really light up a full cloud service. In an enterprise, the margin structures on the platform as a service are much more favorable than they are as an infrastructure as a service. So our on-ramp would be to on-ramp people to infrastructure as a service and upgrade them, up-sell them as they reinvent their IT departments and hopefully we are facilitating that in the platform as a service world. As it relates to the – go ahead….

Steve Ballmer

No go ahead.

Kevin Turner

As it relates to the cannibalization question, as we move people from on-premise to cloud, yes, we are willing to cannibalize ourselves to do it, and we have embraced that. And when I said that transition is underway, it’s underway. And this wasn’t an FY ‘13; we have been working on this for a while. Steve talked about how we bootstrap new products. We have had the Office 365 formerly a not so sexy name of BPOS, on our store dashboard and store card for a while. And we have been driving that volume. It’s finally hitting scale, but we put in a few years there of good toilage and work to be able to get it there. And I think the cannibalization stuff is imminent. There will always be some on-premise out there, but the reality is we want as many of those customers as we can get in the cloud all-in, because number one I can keep them current. And I can get them up to the latest and greatest level without them having to worry about it, because as I have said before publicly, I think one of our big liabilities in the old world was the amount of products that people owned of ours that they didn’t have deployed. In this new world they are deployed, because we are deploying it for them.

The second reason I believe that, that cloud accelerant is going to continue is we can keep them more safe and secure than they can. And everybody has come to the realization of that in Cybersecurity and all of the issues that go along there I think was only going to continue to accelerate. So yes, we have embraced the cannibalization of the cloud and welcome it, because the long-term revenue stream and value for those customers is much different than anything we have had in the past.

Steve Ballmer

Just a reminder, we are not new to the world of commoditization. There were kind of Linux servers in the old world. And we competed against them. And there are – there is always going to be something that looks like a commodity that is low margin, or in the old world people just used free software. So the key is, again, this notion of high value activities. If we can support something that is of great value, believe me, IT people, saving their company money is important, sleeping well at night, because of security, reliability, availability, speed and agility of deployment, there are a lot of places to change what looks like a commodity game right now for storage. And you may not do it for a Silicon Valley start-up. They are going to sit there and get the fine pencil out. But the average enterprise is looking at a total cost of ownership, just like in the old days when they were looking at free Office, and free Windows. I think there is a chance to, again, have a value proposition that is better and lower total cost of ownership even if on some specific item the commoditized workload might look cheaper from either Amazon or Microsoft.

Chris Suh

That’s great. Okay. Let’s stay here in the front, paddle 1 please.

Rick Sherlund - Nomura

Thanks. Rick Sherlund. Steve, I thought you were pretty explicit that there is a version of Office 365 optimized for touch coming for other platforms. So congratulations on that. I think that will be a big step in delivering on your strategy.

Steve Ballmer

And Windows platforms.

Rick Sherlund - Nomura

Yes, touch is a different interface, a different version I am sure. So could you update us perhaps on where you stand in terms of the restructuring, has this already taken place, is it going to take a number of quarters for everyone to know kind of what their structure is, who they are reporting to, and to make all those changes, if you can sort of update us on the status there. And maybe for Amy, I am a little confused about how big the cloud is for Microsoft. We have got a piece here, a piece there. Is there a number you can give us that gives us an idea of how big your actual cloud business is today in aggregate?

Steve Ballmer

Yes, on structure, of course the first thing to do is the first layer and then the second layer and then the third layer and things kind of progress. The first layer is obviously done. There is not a lot of change in Kevin’s world at the next layer. Tami is mostly done. Tony Bates, who runs our business development and evangelism is mostly done I would say, on the business side. On the R&D side, Terry made some moves. He probably has a few more over time as his guys figure it out. But he has put in the structure below him. Satya has perhaps fewer changes that he will make. Obviously with the acquisition of Nokia there will be a set of work that needs to go on that Julie will work on with Stephen Elop, who will run that area. Kirill’s group, because of the kind of special nature in that very profitable business that’s called Dynamics, we are mostly kind of leaving things as is and just matrixing in the marketing and some of the other functions. That’s working.

And Qi, Qi is taking some time. There is nothing to report. He is sort of developing his unified thesis of what to do in order to get kind of the max productivity, the most high value kind of – the most application – effective application development out of his team, and taking into account what we are trying to do. So when there is news there will be news, but he has not done anything at the layer underneath him. His structure looks exactly like it looked before the re-org, and it could stay that way or he could choose to change it. None of anything I said has financial ramifications. I am just talking to you about where things are. And Amy’s already given guidance separately and maybe I will let you finish the question.

Amy Hood

I think, Rick, you asked me to give a cloud revenue number. Why don’t I take that as guidance on what you’d like to hear from me as a KPI, because I don’t think I’d probably give one off the top of my head. It’s probably not the best way of doing it. So let me take that as a KPI input.

Chris Suh

I think we have time for one more question actually. So let’s see, the winner is paddle one.

Unidentified Analyst

(Indiscernible) ambitious and make big, bold bets with big economic upside. And that’s increasingly rare in IT. Frankly, you have been consistent in that over many years. So the question is, why do you think financial markets haven’t recognized that and does that make you do anything differently?

Steve Ballmer

Financial markets should recognize it when it leads to profit growth. So what I basically said is I have a thesis. The company needs to produce every day, and we have got upsides and we have got a little headwind. Kevin and I both talked about it. But we’ve got plenty upside. In the meantime, we will continue to sustain investment in the technology, the talent, the approach that gives us the skills to seize on the next opportunity. If there is one thing I guess you would say I regret, I regret that there was a period in the early 2000s when we were so focused on what we had to do around Windows, that we weren’t able to redeploy talent to the new device form factor called the phone. That would probably the thing I would tell you I regret the most, because the time we missed was about the time we were working away on what became Vista, and I wish we probably had our resources slightly differently deployed, let me say, during the early 2000s. It would have been better for Windows and probably better for our success in other form factors.

So should the market just believe? I can’t argue that. What I can say is the ultimate measure of the place has got to be what happens with profits. It’s got to be the ultimate measure of any company. On that dimension we’ve made bets, the bets have worked, and we are making new bets. And when they work I am sure people will give us credit, whether those are incremental upsides to our current profit pool with some exposures on the downside but incremental upsides, or whether that’s really the next big thing.

Apple was what essentially zero market cap in 1997? And now its enterprise value is close to – and I’ll use enterprise value because that’s kind of how I think. Enterprise value is close to $300 billion. That’s $300 billion a new market cap created on touch and microprocessors. And it happened to be created in that case is through a devices approach. But at the end of the day, if we are not investing in those new opportunities, then it is assured that we have no opportunity for that growth. So I think you should hold us accountable, and I certainly as a shareholder will hold us accountable for continuing to focus in on good short-term results, and at the same time making investments that give us an opportunity to generate someday another $10 billion, $15 billion, $20 billion, $25 billion of incremental profit, which would be great to be able to dream about and certainly a few companies have created those kinds of profit pools in the last 10 years, 15 years.

Chris Suh - General Manager, Investor Relations

That’s great. Thank you. With that, that concludes our Financial Analyst Meeting for today. Thank you all for joining us today, taking the time to come out. We do hope that you stick around for the reception. We’re going to move next door and many of our executives and presenters will stick around and you’ll have a chance for some in formal conversation. Again thank you. For those that have already submitted the survey, thank you again. Well, we’ll pick the winner and we will announce them next week. And we look forward to talking to you soon. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Microsoft's CEO Hosts Financial Analyst Meeting (Transcript)
This Transcript
All Transcripts